Regulatory Agencies tightening rules for subprime mortgages

The Wall Street Journal reports that federal bank regulators issued new guidelines for subprime mortgages on June 29. While some are concerned that these new guidelines could make it harder for many borrowers to get mortgages, I think what they are doing makes some sense.

First, the new guidelines require the 8,000 lenders that must pay attention to them to qualify lenders on their ability to repay the loan using the adjusted rate, not the low introductory rate. The Journal reports that “roughly 75% of subprime adjustable-rate mortgages offered last year were loans with a low flat or ‘teaser’ rate for the first two or three years and then a higher, floating rate…” for the rest of the mortgage term.

Second, the new regulations require borrowers to get more information on income so they can be more confident borrowers are able to repay the loan. “No doc” and “low-doc” loans, often called “liar loans,” may be out.

Third — and this is the most important guideline for those who already have a subprime mortgage — lenders are told to give borrowers the chance to refinance out of an adjustable rate mortgage at lests 60 days before the rate goes up, and this should be done without penalty!

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