New Fed mortgage rules affect subprimes |
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Jumbos treated as subprime?
The chairman of the Mortgage Bankers Association sounded a cautionary note, saying that the group "is carefully reviewing
aspects of the rules including the new standards for determining which loans are treated as subprime." The concern is that
jumbo mortgages for people with excellent credit could be treated as subprime, which was not the Fed's intention.
The definition of "jumbo" already is complicated. Last year, a jumbo loan was a mortgage for more than
$417,000. Now that upper limit has been raised, temporarily, in some markets. In the most expensive places, such as Los
Angeles, a jumbo loan is a mortgage for more than $729,750.
Last August, the secondary market for jumbo mortgages melted down when investors suddenly realized that
they hadn't understood the risks inherent in the jumbo loans they owned. The jumbo market was like a "Looney Tunes" character
who runs off a cliff and keeps running until he looks down. It hasn't climbed all the way out of the abyss yet.
As a consequence, interest rates on jumbo loans are higher than they once were. Jumbo rates are so high that
they could occasionally stray into the Fed's "higher-cost" territory.
The Fed will use Freddie Mac's weekly mortgage rate survey as a benchmark. Any first-lien mortgage rate that
exceeds the comparable Freddie Mac rate by more than 1.5 percentage points would be deemed higher cost. By that standard,
many jumbo loans would be higher cost.
Last week, Freddie's average rate for a 30-year fixed was 6.37 percent. Any 30-year, fixed-rate mortgage
higher than 7.87 would be considered a higher-cost loan under the new rule.
Freddie Mac doesn't (yet) survey jumbo mortgage rates, but
Bankrate does. The nation's biggest jumbo mortgage market is Los Angeles. Last week, of the 10 institutions that Bankrate
surveyed in Los Angeles, nine offered 30-year, fixed-rate jumbo loans. Four of them charged rates higher than 7.87 percent.
(Bank of America and Citibank were highest, at 8.5 percent.) Five institutions offered jumbos below the Fed's trigger rate. One
of those lenders was IndyMac, which has since been taken over
by the FDIC.
The Fed is aware of the issue, and says: "While covering prime jumbo loans is not the Board's objective, the
Board does not believe that it should set the threshold at a higher level to avoid what may be only temporary coverage of these
loans relative to the long time horizon for this rule."
No misleading ads
The Fed laid down a few other rules, too. Those mortgage ads on AM radio will have to change, because the Fed has banned misleading
advertisement practices, such as touting a rate or payment as "fixed" when it can change.
Most controversially, the Fed changed its mind (for now, at least) on yield spread premiums, or YSPs. A yield
spread premium is a commission that a mortgage broker gets for signing a borrower up for a higher rate. YSPs have their uses.
Besides compensating brokers, the money can be used to pay some or all closing costs. If you got a no-fee mortgage when you
bought your house, you paid a higher rate, and the fees were taken out of the yield spread premium. (If you used a bank and not
a broker, the equivalent to a YSP is called a servicing release premium).
When the Fed proposed these rules in December, it wanted to ban yield spread premiums unless the borrower and
broker agreed to a YSP amount upfront. It would have been like locking in a car salesman's commission before picking out which
vehicle you wanted.
Mortgage brokers complained, and the Fed says it conducted tests of YSP disclosures, and discovered that they
confused borrowers. The Fed says it will "consider alternative approaches" to regulating yield spread premiums.
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