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Why the Fed's Plan will Hurt Homeowners |
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Posted December 19th, 2007
The proposal applies to all new loans made by all lenders, including banks and brokers. Finalization is expected next year sometime. Note: While there is a relevant reason for each one noted below, I also noted the reason it is a problem for the buyer. In the end it’s going to make it substantially harder for people to buy homes - period. That will hurt the market overall when we already have ten months worth of inventory! Here is what is proposed, the reason the government feels it will protect homeowners and the reason it won’t. It will hurt more than it helps. Another reason to keep the government out of private enterprise. 1. Restrict lenders from penalizing some sub-prime borrowers who pay off their loans early (This is known in the industry as a prepayment penalty, and almost always is a result of refinancing). The prepays are risk-based and help offset the risk-associated costs of doing business with sub-prime borrowers. 2. Force lenders to make sure sub-prime borrowers set aside money for taxes and insurance (This is known in the industry as impounds). Taxes and insurance that go unpaid force lender-created insurance, and late taxes go on record as tax liens that, when the home is foreclosed upon, also must be paid off. Some homeowners have flexible income; that is, it isn’t steady. It might be commission-based, for instance. Salespeople, for example, may wait until their end-of-year bonuses to pay taxes. Forcing them to impound could be a monthly hardship. 3. Keep lenders from making loans in which they don’t have proof of borrower’s income. It protects the lenders from lending to people who are using stated income loans as liar loans. Some homeowners have flexible income and they work off of bonuses or sales comp checks. People using this loan legitimately may run into problems that are unfair–they won’t be able to use a loan designed for them. This may keep anyone on commission-based income from buying a home. 4. Prohibing lenders from lending without considering a borrower’s ability to repay a home from sources other than the home itself. The lenders are using something other than property to securitize it. While this is great for them, it’s a problem: The general rule has been that you need six months of monthly payments in the bank. That existed throughout the 2000s. To have another source of income or collateral you must have to be able to buy the home negates the entire way our market is set up–that the home is self-securing. It may make sense for lenders to do this to investors, but not for average home buyers. This is going to make it tougher for people to buy homes in the future. Dani Click here to read Dani's New Real Estate Blog, "Babb's Babble " |
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