In an effort to prevent a future collapse in the housing market, Congress just passed a financial reform bill that speaks directly to the ones who caused the softening of the industry. It was during the housing market boom that many lenders lowered their standards to compete for business. The result was a half a decade of poorly written mortgages that eventually failed and cost tax payers billions of dollars to bail out the “to big to fail” companies.
The new regulations focus on the standards that mortgage lenders should meet before they originate new loans and sell those financial products to investors. Many of the proposed changes will affect a loan from the onset of its creation. Congress is requesting tougher underwriting standards and they want to change the way originators get paid. In addition to those changes Congress wants to increase the liability of lenders when a loan defaults.
One of the provisions that industry officials are pushing for is a requirement that would cause loan originators to withhold a 5% stake on their balance sheets. This would in effect cause banks and lending institutions to ensure the quality of their new originations. Representatives within the mortgage industry believe that this new regulation could be problematic due to the amount of capital that would be help and unavailable for banks and lending institutions. Lenders are seeking some relief be requesting that certain mortgages that “qualify” be exempt from the 5% stake requirement.
Qualified loans would have to be considered “low risk” products. All documents pertaining to the loan and its applicant would have to be verified. In addition the loans themselves could not contain features that include interest only payments, negative amortization or balloon payments. Finally, the loans would have a cap placed on certain origination fees at 3% of the lending amount.
The proposed changes by Congress are intended to help shore up the shaky housing market and instill some practical standards for lenders and banks to follow. Some advocates within the industry believe that in the end the only thing that these new rules will do is pass along the additional costs that the banks will incur to new borrowers.
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Its pretty clear its the customer that always ends up paying the bill an I reckon the banks wont allow some rules to stop them lending when the bull market returns
5% stake requirement? I don’t know how feasible that will turn out to be when considering the amounts that lenders put up. But well, anything that can be done to prevent future lending disasters while still keeping financing accessible to qualified consumers.