Bankruptcy & Foreclosures

The Federal Reserve has been keeping busy lately as economic turbulence have them focusing on stabilization efforts. By on March 16th The Fed, for the first time in history, agreed to let investment firms temporarily acquire emergency loans directly from the central bank. This measure, similar to one that’s been available to commercial lenders for years, will continue for at least half a year. It is the broadest use of the Federal Reserve’s lending authority since the 1930s. The goal of course is to create a reliable source for investment firms to have access to short-term cash; at least until the economy becomes more stable.

While this development is being formulated, the Fed is under additional pressure from Congress for being too lax in its supervision methods of lending practices. In response the Fed has proposed a new rule to protect homeowners from shady lending practices. What began as problems for Subprime borrowers has since spread to include even credit-worthy borrowers and the Fed is taking a stand. This new proposal hopes to prevent prospective homebuyers from getting biting off more than they can chew in taking out a mortgage. Often fine print tactics and unwarranted rate hikes are to blame for record-high foreclosure figures.

So what can the Federal Reserve do to help? Their plan intends to restrict lenders from penalizing risky borrowers who pay loans off early, requires lenders to make sure these borrowers set aside money to pay for taxes and insurance, and prevents lenders from making loans without proof of a borrower’s income. Sure it sounds like the Fed is making it more difficult to secure a loan but this is in fact in the best interest of the consumer who, up until now, were often given loans for amounts they were unable to pay back.

As such this new plan would prohibit lenders from engaging in practice of lending without considering a borrower’s ability to repay a home loan from sources other than simply the value of the home itself. This proposal would also crack down on misleading ads for many types of mortgages and reinforce financial disclosures in easier to understand terms to borrowers (hence targeting the fine-print tactics many lenders were guilty of relying on).

If this plan is adopted, it will apply to home loans made by nearly all lenders (banks, credit unions, and brokers).