New Mortgages ... Rule!

Below are some details on the Fed's proposed new mortgage rules courtesy of Briefing.com:

• New final mortgage rules ban prepayment penalties if payment can rise in first 4 years.
• New rules create category of 'higher-priced mortgages' including virtually all subprime loans.
• Lenders must verify repayment ability from income, non-home assets for higher-priced mortgages.
• Lenders must assess repayment ability on highest scheduled payment in first 7 years of mortgage.
• Lenders must establish property tax, insurance escrow on higher-priced first-lien mortgages.
• Lenders may offer borrowers opportunity to cancel escrow account after one year.
• Creditors must provide estimate of mortgage costs, payment schedule,within 3 days of application

If mortgage regulators can enforce their new rules on "higher-priced mortgages," at least as well as they do for "high-cost mortgages," (which they actually do surprisingly well) this new category of home loan means one thing: don't bother applying for a mortgage unless you have nearly spotless credit and money in the bank.

And while many would argue this is a much needed change in the mortgage market, it does raise a few questions:

• Won't this further increase demand for rental units?
  
• Won't this force people to save if they want to own a home?
  
• Isn't money saved different than money spent?
  
• Where was this legislation in 2006, at the height of the boom, even when regulators knew what was going on?
  
• Why do regulators seem to focus so much on making new rules, rather than enforcing the old ones?
  
• If the mortgage market figured out how to get around the old, "high cost loan" limitations, won't it eventually work its way around these as well?

Lone Voice Calls for Intelligent Mortgage Reform

While Congress deliberates on the future of the nation’s mortgage market, some within the government are calling for restraint in regulatory reform. Housingwire.com reports William Emmons, an economist at the St. Louis Fed, is calling for patience and social support as the clearest way to economic recovery.

Emmons makes the argument that government intervention, particularly measures aimed at postponing or eliminating the foreclosure process, will only serve to further tighten the credit crunch that already holds the nation’s economy in its teeth. Instead, he believes Federal funds and regulations should be aimed at helping foreclosed homeowners recover from their unsuccessful forays into homeownership. By focusing on the “cause,” rather than the “symptoms” of our current economic woes, and by allowing markets to sort themselves out, Emmons argues prudent, forward-looking regulatory reforms offer us the fastest route to economic health.

Whatever your opinion on upcoming regulatory reforms, it is clear the actions of the government in the coming months will have a massive impact on housing markets and the economy as a whole. Reforms that promote a healthy and functioning mortgage market while protecting borrowers from the types of abuses so prevalent during the boom will allow investors and homeowners alike to make the right choices in the coming years.