New Fed mortgage rules affect subprimes
By Holden Lewis • Bankrate.com

The federal government has put its foot down: A lender can't give you a subprime mortgage unless you are able to repay it. And that goes for jumbo mortgages, too -- maybe.

You're probably wondering why the feds find it necessary to tell lenders that they shouldn't hand over the money before figuring out whether borrowers can afford the monthly mortgage payments. That seems awfully basic. But for a while, verifying a borrower's ability to pay was out of fashion.

Like bell-bottom jeans, the practice of verifying a mortgage borrower's ability to repay was wildly popular when Led Zeppelin ruled the airwaves, then became hopelessly uncool, and now is popular again.

Subprime loans used to be hot. Now they're not. Subprime lending barely exists because so many of the loans went bad. According to National Mortgage News, the top 10 subprime lenders in the first quarter of 2007 underwrote $52.3 billion; the top 10 subprime lenders in the first quarter of 2008 underwrote $3.3 billion.

From 2003 until last year, stated-income loans were the big fad because they allowed borrowers to exaggerate their incomes without having to provide tax documents that might prove otherwise. Now stated-income loans are rare because they're deemed too risky. They were called "liar's loans" for a reason.

Now, more than a year after stated-income and subprime loans fell out of favor, the Federal Reserve has banned stated-income subprime loans.

Lenders will have plenty of time to adapt to the new rules. They don't go into effect until Oct. 1, 2009.

New 'higher-priced' loans
The Federal Reserve's new rules divide mortgages into two categories: "higher-priced" loans, and everything else. The "higher-priced" category is the Fed's way of defining subprime mortgages, which generally go to people who have had trouble paying their bills on time. Some of the new rules apply only to this "higher-priced" category.

With its new "higher-priced" category, the Fed designed a net to capture subprime loans, but some jumbo mortgages might get caught in it, too.

Under the new rules, you can't get a higher-cost loan unless the lender decides that you can afford the highest scheduled payments during the first seven years of the loan. This means that if you get an adjustable-rate mortgage, you have to be able to afford the payments at the highest possible rate.

The rules ban prepayment penalties for higher-cost loans if the rate can change in the first four years. In any case, prepayment penalties can't last more than two years. And higher-cost loans have to have escrow accounts for property taxes and insurance.

Some rules apply to all mortgages, not just high-cost loans. Lenders and mortgage brokers "are prohibited from coercing a real estate appraiser to misstate a home's value." Servicers have to credit your account when the payment is received and can't play games with late fees. Lenders have to give fee estimates for refinances and equity loans.

Positive response
For the most part, banks and consumer advocates say they like the Fed's new standards. The president of the consumer group ACORN wishes the standards had come sooner, though. "The overall proposal would have been better if initiated several years ago, when many of these bad, unaffordable loans were originated by unscrupulous brokers," ACORN chief Maude Hurd says.

Joe Belew, president of the Consumer Bankers Association, says he hopes "the Fed's new mortgage regulation helps pave the way for the reemergence of healthy, sound subprime lending to deserving borrowers." That paving project might take a long time, as the revival of the Federal Housing Administration, or FHA, has captured the market that used to be subprime.