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Federal Reserve Tightens Mortgage Underwriting Rules
The Federal Reserve Board approved a final rule on July 14 that is intended to better protect consumers and facilitate responsible lending by prohibiting unfair, abusive or deceptive home lending practices and restricting certain other mortgage lending practices.
The new rule generally follows a proposal that was released by the Federal Reserve in December.
In an April 8 letter (link for NAHB members only) commenting on that proposal, NAHB said it supported the Fed’s efforts to bolster mortgage lending standards and consumer protections. However, the association voiced concern over a definition of High Priced Mortgage Loans (HPML). While that definition was aimed at covering all of the subprime market and a significant portion of Alt-A lending, NAHB said that at various times it would also apply to a significant share of the prime mortgage market, which was not the Fed’s intention.
The proposed rule defined an HPML as a loan with a rate three percentage points or more above the yield on comparable Treasury securities (five percentage points for subordinate liens). NAHB said that tying the spread to a prime mortgage benchmark — such as Freddie Mac’s Primary Mortgage Market Survey — would be a better approach.
A mortgage benchmark, NAHB said, would eliminate problems associated with anomalies in market-based spreads between Treasuries and mortgages and would more precisely identify high-priced mortgages relative to prime loans. In the process, most prime and high-quality jumbo mortgages would be excluded from the regulation, as the Fed intended.
In response to NAHB’s comments, under the final rule the definition of an HPML will be based on the spread between a mortgage rate series, the "average prime offer rate," which the Fed will publish. This series will be similar to the survey currently published by Freddie Mac.
An HPML will be defined as a first-lien mortgage with an annual percentage rate that is 1.5 percentage points or more above this benchmark, or 3.5 percentage points if it is a subordinate-lien mortgage.
NAHB believes that the use of this benchmark will cover virtually all loans in the subprime market, but generally exclude loans in the prime market from the new mortgage lending restrictions.
For loans meeting the HPML definition, the following will apply:
- Lenders must take into account a borrower’s ability to repay the loan.
- Lenders must verify borrower income and assets.
- Lenders are banned from requiring prepayment penalty periods for more than two years.
- Lenders must establish escrow accounts for property taxes and insurance.
In addition, for all mortgages, the final rule cracks down on deceptive mortgage advertising, loan servicing abuses and pressuring appraisers. A key provision missing from the final rule was a proposed restriction on “yield spread premiums,” which are a key source of revenue for mortgage brokers.
The final rules are effective Oct. 1, 2009, with the exception of an escrow requirement that takes effect on April 1, 2010 for site-built homes and on Oct. 1, 2010 for manufactured housing.
For more information, e-mail John Dimitri at NAHB, or call him at 800-368-5242 x8529.
 Want to Know the Housing Forecast for the Top 100 Metros?
Find out in HousingEconomic.com’s 2008 to 2009 Metro Forecast (free preview).
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To learn more, visit www.HousingEconomics.com.
 Free NAHB Kit Gives Builders Back-to-Basics Tips to Navigate the Slowdown
What was once expected to be a relatively mild housing slump following three years of record new home construction and sales has given way to a significant downturn.
To help members navigate the uncharted waters of this slowdown, NAHB has compiled a comprehensive “Back to Basics” online toolkit — the best of the basics, the tried and true and the truly new. To access the toolkit, click here.
To access the “Back to Basics” toolkit, you must be an NAHB member and have a login to www.nahb.org. To create a login, go to www.nahb.org/login or click on the log-in button on the main menu bar.
For assistance, call the NAHB Member Service Center at 800-368-5242.
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