The U.S. Federal Reserve proposed new rules Tuesday that aim to severely reduce some of the high-risk mortgages responsible for recent mortgage-market turmoil. Some critics said the measures fell short. Highlights of the proposed rules include prohibiting a lender from relying on a borrower's unverified income or assets; putting the onus on lenders to consider borrowers' ability to repay the loan; restricting repayment penalties; and requiring lenders to set up a escrow account through which the borrower will pay property taxes and insurance, from which the borrower may opt out after a full year. "Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and, indeed, the economy as a whole," Fed Chairman Ben Bernanke said Tuesday. "They have no place in our mortgage system."
Democratic lawmakers criticized the Fed for failing to act before the current wave of home foreclosures and for not seeking more substantial changes in mortgage-industry practices. They also said the rules address a subprime market that has largely dried up: At the 2005 peak of the housing bubble, lenders dished out about $625 billion in subprime loans; presently, the annual rate is only about $50 billion. Senate Banking Committee Chairman Christopher Dodd said that following what he considers a lack of sweeping changes, he is now considering taking more power away from the central bank. Conversely, bankers were generally supportive; the Independent Community Bankers of America called the rules an "important step."
Wednesday, the Fed is set to announce the results of its $20B auction of low-rate 28-day loans to banks (The Fed's Two- Prong Plan to Thaw Credit Markets). A successful auction would support the Fed's claim that its present measures are succeeding.
Additional Reading: Blaming the Fed for the Sub-Prime Mortgage Crisis • Banks Worldwide Engage in Global Coordinated Panic
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Jay Jay
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Dec 19 11:59 PM