A mortgage standards reform has been proposed by the Federal Reserve as a strategy to curtail abusive practices that are responsible for the foreclosure crisis. If the reform passes, lenders would be required to adhere to a checklist comprised of eight factors used to determine borrowers\’ ability to pay back the loan.

The proposed mortgage standards reform recommends implementing a mandatory 20 percent down payment from borrowers that acquire financing to purchase real estate. Banks would be held responsible for their investment decisions and make borrowers accountable for repayment of the mortgage note.

The rule also recommends changes to underwriting standards and suggests alterations to the definition of a qualified mortgage. The new guidelines are anticipated to become effective in the fourth quarter of 2011 and will be governed under the Consumer Financial Protection Bureau.

Most people agree substantial modifications should be made within the mortgage industry. Over the past few months investigations have been initiated against several banking giants including Wells Fargo, JPMorgan Chase, and Bank of America, to name a few. Banks have been under investigation by state Attorney Generals, Federal investigators, Federal Housing Authority, Justice Department, and the Securities and Exchange Commission.

Reform of the policies which have permitted banks to engage in dubious financial practices and wrongful foreclosure are way past due. Within the past six months, federal reforms have been introduced to legislation including the Regulation of Mortgage Servicing Act and the Short Sale Act of 2011.

The proposal submitted for mortgage standards reform complies with regulations set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Signed into law on July 21, 2010, Frank-Dodd was founded to make certain borrowers obtain sufficient information regarding any loans they obtain from banks, credit unions, advanced payday loans, and credit card companies.

Although real estate professionals agree that reform is necessary, many are worried about changes that are proposed in the rule. Much of the concern stems from proposed changes to the underwriting standards for Qualified Residential Mortgages (QRM).

QRMs are described by \”The Atlantic\” as \”loans that meet specific guidelines that allow lenders to avoid risk retention requirements.\” The proposal suggests any individuals who obtain financing to buy real property must provide a down payment of at least 20 percent in order to reduce risk of loan default. Federal regulators also suggest that in addition to higher down payment requirements, borrowers will also be required to pay closing costs.

Real estate agents have voiced concerns that these demands would cause additional decline in home sales. They also are concerned that the 8-point checklist would prevent a large percentage of borrowers from qualifying for a mortgage loan.

To add insult to injury, legislation has been proposed to disallow homeowners from deducting mortgage interest on their tax return. This encompasses interest paid on mortgage notes and home equity loans.

Yet another dilemma surrounding the recommended mortgage standards reform is the impact it might have upon Federal Housing Authority (FHA) loans. FHA has been a preferred home loan program since 1913. Almost 60 percent of mortgages are insured through the FHA. The rule recommends reducing FHA loans to less than 15 percent.

Mortgage reform has become a catch-22 situation that requires careful examination. While it can be helpful at curbing future lending problems, it puts restrictions on borrowers who can afford to pay loan installments, but cannot acquire the proposed 20 percent down payment.

If banks comply with changes proposed within the mortgage standards reform there is the potential for positive changes to occur within the real estate market. On the other hand, tightened lending restrictions and larger down payment requirements could keep the market stagnant.

Author Bio: Simon Volkov is a private real estate investor and author who shares information about current events in the marketplace. Current topics include Mortgage Standards Reform, Regulation of Mortgage Servicing Act, and the Short Sale Act of 2011. Stay abreast of legislation by visiting www.SimonVolkov.com.

Category: Real Estate
Keywords: mortgage standards reform, new mortgage rules, qualified residential mortgages, home equity loans