Fed Dictates: Mortgages Must Be Affordable

Excerpted from Federal Reserve Chairman Bernanke’s speech at the FDIC's Forum on Mortgage Lending for Low and Moderate Income Households (July 8, 2008):

“Next week, the Federal Reserve Board will issue new rules on mortgage lending, using its authorities under the Home Ownership and Equity Protection Act. These new rules, which will apply to all lenders and not just banks, will address some of the problems that have surfaced in recent years in mortgage lending, especially high-cost mortgage lending.”

The New York Times “Fed to Clamp Down on Exotic and Subprime Mortgages” reports that all are not happy with the proposals. I first detailed these in "Common Sense comes to the Fed". The Fed received over 5,000 critical letters from the mortgage and housing industries. The American Bankers Association, the Mortgage Bankers Association and the Independent Community Bankers of America trade groups had no compliments either. All this because our Fed Chairman wants home buyers to be able afford their mortgages without having to sell their homes.

The Times says the new rules will apply to mortgages with rates 3 percentage points over corresponding treasuries versus an 8 percentage point spread previously. The chief complaint is that almost all mortgages will be covered under the new definition of “high cost”.

The proposal “Highlights of Proposed Rule to Amend Home Mortgage Provisions of Regulation Z” was originally issued on December 18, 2008 and revised on March 18, 2008. Bernanke did not comment on any additional updates after March 18, 2008.

The new rules open financial institutions to potential liabilities for lapses in documentation and procedures. FDIC Chairwomen Bair recommended against any safe harbor provisions to protect lenders. The positive side is that most mortgages will withstand fluctuations in housing prices, and we now have a built in brake to stop excessive appreciation.