Feds get involved, lending standards tighten
The coming tide of foreclosures has captured the attention of Congress. House and Senate committees have held hearings, but no major legislation has resulted so far. Regulators are on notice, though. Federal regulatory agencies have proposed guidelines strongly suggesting that lenders extend subprime ARMs only to customers who can afford to make payments at the maximum possible interest rate.

As a result of rising foreclosures and regulatory pressure, lenders have been tightening their criteria for extending subprime mortgages and other types of loans, especially a nonstandard type of mortgage called alt-A, which typically doesn't require full documentation of income or assets.

Michael Moskowitz, president of Equity Now, a mortgage lender, says the criteria for some loans have become too strict. "Now it's a little tougher to do deals that are actually good deals," he says. "Most people now are looking to 2008. In the month of August, things worsened notably with American Mortgage going out of business. The feeling is that it will take some time."

Tips for avoiding bad mortgages
But how does a borrower distinguish a good deal from a bad one?

"I think one thing that you do, definitely, is you insist on a disclosure," Moskowitz says. "Anyone who doesn't give you a disclosure within three days, the way they're supposed to do under federal regulations -- don't even talk to them."

Ask the broker or loan officer for references to three recent customers who have roughly the same income and credit profile as you. Then call them. "People will talk," Moskowitz says. Ask them how long it took to close and if the original estimate of rate and fees changed before closing, "because maybe they got bamboozled a little bit."