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Heads-Up Borrowers: Dramatic Week for Mortgage News

There were mixed messages for borrowers in this week’s mortgage news, but there was certainly no shortage of headline-worthy stories:

The message on balance was that potential mortgage borrowers may not want to delay exploring their options, as long as they make educated choices about their loans.

New Federal Reserve Mortgage Lending Guidelines

Highlights of the Fed’s new mortgage lending guidelines include:

  • Creation of a new category of “higher-priced mortgage loans,” for which special restrictions will apply
  • Requiring lenders to make a more stringent assessment of a borrower’s ability to repay a mortgage loan
  • Requiring lenders to verify the income and asset information on which that repayment assessment is made
  • Restricting prepayment penalties on higher priced and adjustable rate mortgage loans
  • Requiring creditors to create escrow accounts to cover property taxes and insurance on all primary mortgages
  • Prohibiting creditors and mortgage brokers from coercing real estate appraisers
  • Tightening regulations on when payments are credited and how late fees are assessed
  • Requiring an upfront disclosure of loan costs and payments for all mortgage loans, not just home purchase loans

Leaving aside the natural surprise that the Fed should feel it necessary to ban coercion, all of the above are aimed at making for a more borrower-friendly environment, though it should be noted that these measures do not take effect until October 1, 2009, and only cover loans written from that date onward. In the meantime, borrowers can take a cue from the Fed and shop for loans which have little or no prepayment penalties.

Life Without Fannie Mae and Freddie Mac?

Considering the difficulties involved in both bailing out and then reforming Fannie Mae and Freddie Mac, the relevant question for potential mortgage borrowers is what would life be like without those entities. After all, even if they survive, their regulatory and financial ability to continue to provide liquidity to the mortgage market is bound to be curtailed.

Without Fannie Mae and Freddie Mac to back up loans, lenders would be much more conservative. That’s a good thing in the big picture, but for individual borrowers it means larger down payments, higher interest rate premiums, and tougher qualification standards. In other words, as tough as things are for borrowers today, they might just get tougher in the future.

An Ominous Note for Mortgage Rates

The new Fed regulations suggest a more borrower-friendly environment in the future, while the problems of Fannie Mae and Freddie Mac suggest things may be about to get tougher for borrowers. What might tip the balance toward a borrower acting now are the recent inflation releases. With year-over-year figures for wholesale and consumer inflation coming in at 9.2% and 5.0% respectively, today’s mortgage rates may seem like a real bargain in the very near future.

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