Federal Reserve has been under constant fire for its handling of the sub-prime monster. Tuesday saw the bank accept its poor handling of the circumstances that led to the crisis. The bank acknowledged that lenders aggressively sold loans to buyers with poor credit capacities.
To rein in aggressive lenders and prevent such crisis in future, Fed proposed a strict set of rules on exotic mortgages and loans for people with weak credit. These rules are a part of two-pronged strategy. On the one hand they are designed to manage the existing crisis, and on the other these will also curb in liberal credit practices that seem to be so rampant.
The new rules, in effect, would force mortgage companies to show that customers can realistically afford their mortgages. The lenders would have to verify the borrowers’ income and assets to assess their repayment capacities. Fed wants to prohibit prepayment penalties levied on the buyers who make early payment of their mortgages. Mortgage brokers would also have to disclose in writing whether they received bonuses for selling loans at interest rates that were higher than a borrower qualified for.
US Central Bank has also decided to exercise tougher checks on misleading mortgage ads. Lenders shall also be prohibited from exerting undue influence appraisers to misrepresent the values of homes involved. All in all these measure are aimed at curbing the unfair practices that have plagued credit markets.
Ben Bernake, Chairman of the Federal Reserve, commented this on the proposed rules:
Mortgage market discipline has in some cases broken down, and the incentives to follow prudent lending procedures have, at times, eroded.
Commenting on the unfair trade practices he added:
Unfair and deceptive acts and practices hurt not just borrowers and their families but entire communities, and, indeed, the economy as a whole.
The proposals do fall short of what many consumer agencies were lobbying for. However, they are in a sharp contrast to the reluctance of Reserve to check the questionable practices that had crept into the mortgage market. It does look like the Fed has finally been jolted into action by the summer collapse of the sub-prime market.
The rules do not go into effect before the expiry of a three month period, during which they will be open for public comment. Till then it is back to cutting interest rates to ease the plight of poor defaulters. And we are not considering the irresponsible ones who tried to take the advantage of boom in the housing market.
Either way it is going to be a hard Christmas.
