New Fed rules aim to protect home buyers

WASHINGTON • In a move long sought by consumer advocates, the Federal Reserve issued on Monday rules intended to prevent brokers and lenders from unfairly profiting from new mortgage loans.

The rules ban the abuse of the yield-spread premium, a practice that often put buyers into unstable and expensive loans simply to generate extra commissions.

“This is a real milestone,” said Michael Calhoun of the Center for Responsible Lending, which had long argued against the premiums.

“People didn’t just happen to end up in risky loans during the boom,” Mr. Calhoun added. “Mortgage brokers and other people on the frontlines were getting two to three times as much money to push buyers into those loans than they were into 30-year fixed-rate loans. So what do you think happened?”

In some cases, borrowers never knew they were paying more in interest than they needed to. In others, they thought they were saving money by exchanging lower fees for a higher rate. But consumer groups argued that the borrowers often ended up paying both higher fees and a higher rate.

While the new rules prohibit payments to a lender or broker based on the loan’s interest rate, they allow for compensation based on a fixed percentage of the loan amount.

The Fed rules take effect in April. Similar and in some ways more comprehensive rules are in the financial reform bill that passed Congress this summer. Those rules will take effect later.

Fannie Mae and Freddie Mac in spotlight • The administration of President Barack Obama will bring together bankers, investors, housing experts and policymakers today for the Conference on the Future of Housing Finance. The goal is to address the problems of Fannie Mae and Freddie Mac.

Practically all new U.S. mortgages are guaranteed by Fannie Mae and Freddie Mac and the Federal Housing Administration. Since the credit crisis began the Federal Reserve has purchased $1.1 trillion in agency mortgage securities as a means of propping up the market and keeping loan rates low. This creates great risk for the taxpayers.

Fannie Mae and Freddie Mac “are quite profoundly broken,” economist Raj Date of the Cambridge Winter Center told CNN. “But no one wants to disrupt the only thing that’s working right now in the mortgage market.”

Congress under pressure • Rep. Barney Frank, D-Mass., said the House Financial Services Committee would hold hearings in September on the Fannie Mae and Freddie Mac situation.

Lawmakers agree that Fannie and Freddie should stop borrowing heavily from the capital markets. Beyond that, there is little agreement.

Democrats seem to be moving in the direction of turning Fannie and Freddie into much smaller entities that buy individual mortgages, pool them and sell them back into the market to private investors. Republicans who don’t back a fully private market are likely to push for a government guarantee that is available for any corporate mortgage investor packaging loans, not just Fannie and Freddie.

However, some sort of government guarantee is likely, largely because of the influence of the housing lobby, including the Mortgage Bankers Association, the National Association of Realtors and the National Association of Home Builders.

“The housing industry is dead set on having guarantees,” said Mark Calabria, of the CATO Institute in Washington.

2 thoughts on “New Fed rules aim to protect home buyers


    The Office of the Comptroller of the Currency (OCC) is the federal regulator of the national banking system. Traditionally it had not interfered with the creation and enforcement of state consumer protections and civil rights laws. This, however all changed with the passage of the Financial Services Modernization Act of 2000.

    The result was nearly a decade of terror, an all out assault on the states abilities in enforcing consumer protection laws thereby rendering the states impotent. No longer a regulator, they became an enabler, opening wide the umbrella of protection under which subsidiaries and affiliates could attach, no matter how loose the association.

    In 2002 the OCC shielded National City Bank from state law enforcement by Washington State, stopping the action completely, in affect sanctioning NCB’s practices as permissible.

    In 2003 the OCC struck down Georgia’s predatory lending laws, the most comprehensive to date that prohibited predatory lending practices, prepayment penalties, balloon payments, and loans made without consideration of a borrower’s ability to repay. Further though, it imposed strict assignee liability on investors that trafficked in securitizing subprime mortgages thought to be predatory in nature. The entire law was preempted and once again government sanctioned predatory lending continued on its path of destruction, the worst of which was still a few years in the future.

    In January 2004, the OCC broadened its preemption policies; the bank activities rule and the visitorial powers rule. The bank activities rule preempts any state laws that intervene, impair or obstruct a national banks ability to seamlessly engage in real estate lending or other lending, by extension this includes any organization that serves in a capacity, even if of minimal assistance to its national bank parent is subject to the same regulatory oversight as the parent.

    What happened was a mass exodus of the state regulated lenders to take cover under the umbrella of a national bank.

    John C Dugan’s testimony is an act of perjury upon the FCIC. This man is a liar and can be disproved as such by the

    * Center for Responsible Lending
    * Loyola Consumer Law Review
    * The George Washington University Law School
    * The Supreme Court ruling of 2009
    * Ken and Michele Dost’s experience and the non-action of the OCC

    Here is a final note to consider:

    Ownit Mortgage was partnered with NeighborWorks, an organization devoted to housing counselors under the OCC. Together they were developing underwriting rules for situations ‘in which 5 borrowers can be on one note. Three have FICO scores. Some occupy the property and some don’t. One is a child who contributes a paycheck to the household, and another is an uncle.’

    This is the sort of reckless behavior the OCC was endorsing……

    Kenneth Dost

  2. Yield Spread Premiums were undoubtedly a major contributor, remember 70% of all subprime loans written actually qualified for prime but whose borrowers were steered to subprime. The YSP being the inducement for brokers and lenders. Ohhh…..You never heard that statistic, have you? Of course, the media does not speak of matters of truth when it comes to the subprime borrower, because if it did the foreclosure problems would have been solved long ago.
    Here is the problem though. The public conversation is always on Fannie and Freddie (the agency loans), but is neglectful the nonagency loans, wherein the real problems lay. I surmise this being the case, because opening this box forces the discussion towards the true causes of the subprime crisis.
    I want real solutions to the real problems. I want those that fixed the system held accountable. I want to hear the name Bill Dallas as often as I hear Fannie and Freddie, this is where we should be equally concentrating our efforts.

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