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Fed considers mortgage protections

New rules aim at reining in some lending practices, especially for subprime borrowers.

By MSTARKEYN
Published December 16, 2007


WASHINGTON - People taking out home mortgages may gain new protections soon against shady lending practices as the Federal Reserve seeks to back even the riskiest borrowers, already hit hardest by the housing and credit crunches.

Rules expected to be proposed Tuesday would apply to loans made by all types of lenders, including banks and brokers. The plan from the Fed, which has regulatory powers over the nation's financial system, could be finalized next year. The effective date would be known then.

The Fed is considering:

-Barring lenders from penalizing subprime borrowers - those with spotty credit or low incomes - who pay their loans off early.

-Forcing lenders to make sure that borrowers, especially subprime borrowers, set aside money for taxes and insurance.

-Restricting loans that do not require proof of a borrower's income.

-Examining lenders' failure, in some cases, to consider a borrower's ability to repay a home loan.

-Improving financial disclosure so people better understand the terms and conditions of their mortgages and get this information when it is most useful.

-Curtailing abuses in mortgage advertising.

"We have an obligation to prevent fraud and abusive lending," Fed Chairman Ben Bernanke said earlier this year. "At the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.'

The issue has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures. The crisis has raised the odds that the economy might fall into a recession, roiled Wall Street and given Democrats and Republicans much fodder to blame each other.

On prepayment penalties, consumer advocates say these deter homeowners from refinancing on more favorable terms. Those penalties can be hard on borrowers who want to get out of adjustable-rate mortgages that reset from a low introductory rate to a much higher one they have trouble paying off.

Mortgage industry representatives say prepayment penalties ensure that lenders receive a minimum return if loans are paid off early. They also say people with mortgages that include such penalties often get a benefit of lower up-front costs or lower interest rates.

Of the nearly 3-million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.

When home values weakened, borrowers were left with loans balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.

As for the idea of setting aside money to cover taxes and insurance, consumer groups worry that subprime borrowers do not know about these expenses or might not be able to budget for them. These groups also have raised concerns about lenders quoting subprime borrowers monthly payments that do not include taxes and insurance costs.

Mortgage woes

Homeowner protection: People taking out home mortgages may gain new protections soon against shady lending practices as the Federal Reserve seeks to back even the riskiest borrowers.

Universal rules: Rules expected to be proposed Tuesday would apply to loans made by all types of lenders, including banks and brokers. The Fed's plan could be finalized next year.

Examples: The Fed is considering, among other measures, to bar lenders from penalizing subprime borrowers who pay their loans off early and to examine lenders' failure, in some cases, to consider a borrower's ability to repay a home loan.