Fed proposes new restrictions on subprime, alt-A loans

The Federal Reserve proposes imposing some restrictions that currently apply only to very costly loans -- including a ban on most prepayment penalties -- to subprime and some Alt-A loans.

The product of a series of hearings, the proposed changes in how the Fed implements the Truth In Lending Act, or TILA, are intended to protect consumers from unfair or deceptive home mortgage lending and advertising practices.

While the proposed regulations drew a mixed reaction from lenders, Connecticut Democrat Sen. Chris Dodd issued a statement slamming them as "deeply disappointing," and "a clear signal that legislation is necessary to help protect homeowners from abusive and predatory lending practices."

The proposed amendments to Regulation Z, which spells out the Fed's implementation of TILA, would require lenders making "higher-priced" mortgage loans to:

• Verify a borrower's ability to repay a loan with an adjustable-rate mortgage after a payment reset, including property taxes, homeowners insurance and other expenses.
• Document income and assets, using a borrower's Internal Revenue Service Form W-2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer's income and assets.
• Establish escrow accounts for taxes and insurance, which borrowers could opt out of after one year.

The new regulations would also ban prepayment penalties on higher-priced loans unless the consumer's debt-to-income ratio does not exceed 50 percent of verified monthly gross income, and the source of the prepayment funds is not a refinancing by the same lender or its affiliate.

Only higher-priced mortgage loans on a primary residence -- including home-purchase loans, refinancings and home-equity loans -- would be subject to those provisions in the new regulations. Mortgages on vacation properties, open-end home-equity plans, reverse mortgages, or construction-only loans would be exempt, and loans to investors are, for the most part, not covered by TILA.

Higher-priced loans would be defined as first-lien mortgages with an annual percentage rate (APR) of 3 percent or more above the yield on comparable Treasury notes, or 5 percent for second mortgages.

In addition to extending some provisions of the Home Ownership and Equity Protection Act (HOEPA) to subprime loans, the proposed regulations would also create some additional new requirements for all loans, including:

• Written agreements between borrowers and mortgage brokers collecting yield spread premiums, before the consumer applies for the loan or pays any fees.
• Prohibitions on coercing appraisers to inflate property valuations.
• New requirements for loan servicers, including crediting consumers' loan payments to the date of receipt and providing a schedule of fees to consumers upon request.

Dodd criticized the proposed language requiring lenders to evaluate a borrower's ability to repay a loan difficult to enforce, because regulators would have to show a "pattern and practice" of violations. The Connecticut lawmaker called the language a "significant step backwards" from existing guidance on the topic from regulators.

He said allowing borrowers to opt out of escrow accounts after one year could provide unscrupulous lenders a "tool to 'flip' borrowers into another, wealth-stripping refinance."

While the proposed measures don't go as far as some consumer groups and lawmakers had wanted, they represent a significant departure for the Fed, which has come under fire from critics who say it has failed to use its authority under the Truth in Lending Act to prohibit abusive lending practices during the boom.

Lenders have argued against stricter regulations, saying market forces have put an end to many of the most egregious practices and that new restrictions could worsen the credit crunch.

"There is much to commend and much to worry about in the proposed rules," the American Bankers Association said in a statement on the proposed Regulation Z changes.

While the ABA welcomed "uniform, national standards" that will apply to all lenders and target abuses by unregulated or lightly regulated nonbank lenders, the group warned that "replacing important lending flexibility with rigid formulas might also limit lending to some creditworthy borrowers."

Some consumer groups wanted the Fed to simply lower the thresholds that trigger existing HOEPA requirements. Both first-lien loans with an annual percentage rate (APR) more than 8 percent above the rate on Treasury securities of comparable maturity and second-lien loans with APRs more than 10 percent higher are covered by HOEPA.

Among the most feared provisions of HOEPA are the rights it gives borrowers to sue lenders who violate its requirements, allowing them to recover statutory and actual damages, court costs and attorneys' fees. Borrowers also have up to three years to cancel a loan that is subject to HOEPA if they can show the requirements weren't followed.

A bill introduced Dec. 12 by Sen. Dodd, The Homeownership Preservation and Protection Act, would lower HOEPA thresholds to a range of 6 to 10 percent for first mortgages, and 8 to 12 percent for seconds. Loans in which total points and fees exceed 5 percent would also trigger HOEPA requirements under Dodd's bill.

Opponents have warned that lowering HOEPA thresholds to cover subprime loans could discourage investors from buying mortgage-backed securities on Wall Street, further reducing the flow of investment capital into mortgage lending and increasing the cost of borrowing for home buyers.

"Any federal law that begins with amendments to existing HOEPA likely will be freighted with HOEPA's effects," industry lawyer and lobbyist Donald Lampe told members of the House Financial Services Committee in May. "Hardly anyone … in the secondary market funds or purchases HOEPA loans."

Instead of lowering the threshold for triggering HOEPA requirements, the Fed proposes to create a new class of higher-priced loans that would be subject to new regulations.

Lenders who followed the rule that they verify and document a borrower's ability to repay a loan would be granted "safe harbor" from lawsuits if they had a reasonable basis to believe that borrower would be able to make loan payments for at least seven years.

The proposed definition of a higher-priced loan -- 3 percent above comparable Treasury notes for first mortgages, or 5 percent for seconds -- is already used to collect data under the Home Mortgage Disclosure Act.

The definition is intended to "capture the subprime market, but generally exclude the prime market," staff members of the Fed's Division of Consumer and Community Affairs said in a Dec. 12 memo summarizing the proposed changes. There is no uniform definition of prime and subprime markets, however, the memo noted, and the proposed thresholds "would capture at least the higher-priced portion of the alt-A market."

The Fed is requesting comment on whether different thresholds, such as 4 percent for first-lien loans, "would better meet the objective of covering the subprime market and excluding the prime market," and on ways to "limit creditor circumvention" of the thresholds.

The lending industry has argued that prepayment penalties can benefit borrowers by allowing lenders to charge lower interest rates.

But critics say many consumers aren't very good at factoring in their potential cost into the price of a loan, which is not included in the annual percentage rate. Studies have shown most borrowers with adjustable-rate mortgage (ARM) loans seek to refinance before their interest rates reset, and prepayment penalties can decrease a borrower's home equity and increase their loan balance when financed into a new loan.

The new tougher restrictions on prepayment penalties "should allow the vast majority of subprime borrowers to refinance their mortgages without paying a prepayment penalty before the first payment increase takes effect," Fed staff members said in a memo to the Board of Governors.

Dodd questioned the adequacy of provisions intended to limit the use of prepayment penalties and yield-spread premiums, which he said are used to put borrowers in more expensive loans than they qualify for.

All in all, the proposal "raises serious questions as to whether the Federal Reserve is the appropriate institution to house consumer protection functions," Dodd said in a statement. "This is a clear signal that legislation is necessary to help protect homeowners from abusive and predatory lending practices."

The House of Representatives on Nov. 15 approved a bill, HR 3915, the Mortgage Reform and Anti-Predatory Lending Act of 2007, which would limit prepayment penalties, set minimum standards for all mortgages that lenders assess a borrower's ability to repay, and expand HOEPA restrictions.

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source: inman.com

New-home defects often missed

Dear Barry,

Is it necessary to get my own home inspection on a newly constructed home, or should the inspection by the city inspector be accepted as adequate? --Dean

Dear Dean,

Some readers may wonder why this subject, in varying forms, is recurrent in this column. It is because questions about inspecting new homes are asked so frequently and because the answer is vital to anyone who plans to buy a new home.

Experienced home inspectors have learned that all new homes have defects of one kind or another, regardless of the quality of construction or the integrity of the builder. This is because human imperfection prevents anything as large and as complex as a home from being constructed flawlessly.

A commonly held fallacy is that all construction defects will be discovered by municipal building inspectors. This view is highly mistaken, but not because of professional shortcomings on the part of those inspectors. The purpose, scope, time allotment and procedures for municipal inspections are not the same as for home inspections.

Municipal inspectors inspect primarily for code compliance, not for quality of workmanship. They can cite a builder for improper structural framing or for noncomplying drain connections, but a poorly fitted door, an uneven tile countertop and slipshod finish work are not included in the list of concerns.

Municipal inspectors rarely inspect an attic or a subarea crawl space. They come to the job site with a clipboard and a codebook, not with a ladder and overalls. Construction defects in such areas can escape discovery.

Municipal inspectors typically inspect a roof from the ground or possibly from the builder's ladder. From these perspectives, roof defects are not always apparent. And final inspections are performed before the utilities are turned on, so municipal inspectors cannot determine if or how well the appliances and fixtures truly work. They don't test outlets for ground and polarity because this can be done only after the power supply is turned on. Nor, without power, can they test the performance of GFCI or AFCI safety breakers.

The lack of utilities also prevents the testing of plumbing fixtures such as sinks, showers, tubs and dishwashers, and of gas fixtures such as furnaces, fireplaces and water heaters.

As repeatedly expressed in this column, those who buy new homes should not forego the benefits of a thorough home inspection. Just be sure to find an inspector with years of experience and a reputation for thoroughness.

Dear Barry,

Our home was built in 1978 and, until recently, had acoustic "cottage cheese" ceilings. My friend helped to scrape off the ceiling texture and a week later developed a sore throat. Now he fears that he has been adversely affected by breathing asbestos. Is this a valid concern? --Amy

Dear Amy,

Scraping a 1978 ceiling without having it tested for asbestos was not a wise course of action. However, there are no short-term health effects associated with asbestos exposure. The only documented cases of asbestos-related disease involve people who were subject to repeated, long-term exposure. The damaging effects attributed to asbestos are lung cancer, asbestosis and mesothelioma.

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source: inman.com

Holidays have potential for wooing buyers

The neighborhood kids all arrived, bundled in holiday scarves and hats, plus patent leather shoes usually reserved for weddings and Sunday Mass at St. Theresa's.

Our old house, a large in-city place jammed with the craziness and crayons brought by four young people, was the designated gathering spot -- especially for one famous day each year. And, on that day, we were more than the most popular house in the neighborhood.

We got to host Santa ... before Christmas Eve.

Why us? Had we clearly put the most distance between naughty and nice?

The truth is that we made a successful bid at the local babysitting co-op auction fundraiser and the reward was a one-hour visit from The Big Fella.

We invited the neighborhood, the event became a huge success and our home was deemed headquarters for Santa's annual pre-Christmas visit -- regardless of who won "the hour" at subsequent co-op auctions.

On that first Santa Day, all of our friends remarked how our home always looked terrific during the holidays. I had never really thought about it very much until a six-year-old, visiting from out of town, asked: "Does your home always smell like cookies?"

As the neighborhood kids were coaxed into Kodak-moment, family-portrait poses with their parents and Santa near the Christmas tree, I sat back and thought how appealing the house actually was.

If there's one time of year when houses actually feel presentable, it's during Christmas. And it's not just the Yuletide decorations. The kids seem to help more, perhaps knowing the consequences of how whining as an art form nets fewer presents under the tree; bulky furniture and toys often are stowed in an attempt to save space, and pleasant baking sensations come consistently from the kitchen.

I know it bucks common wisdom -- which says nobody looks at or buys houses during the holidays -- but if you have your house on the market, encourage your agent to show it and have an open house during this special time of year.

Just remember that even though Santa is about ready to slide down the chimney, you won't have to move out immediately even if a buyer walks through the door tomorrow.

A lot of people can't afford the luxury of waiting until spring when all the flowers look lovely. The bottom line is that discriminating, qualified buyers are chasing homes, not seasons. In addition, there will probably be a lot more homes on the market in January and February so the competition for buyers will be greater.

Savvy agents suggest keeping a fire in the fireplace and raking up any remaining leaves in the yard. It's also not a bad idea to keep that oven churning out your favorite treats. Aroma -- and perception -- often brings out memories of great times, and tastes, from specific holiday kitchens.

Never underestimate the value of tasteful decorations. I once knew a family who actually counted on visitors after dark because their home for sale had one of the most compelling light displays in town.

Such artful holiday decorations could put more money in your pocket by bringing a better sales price. The prospective buyer sees something special, something extraordinary.

Keep the interior of your house as free of clutter as possible. Ask Santa to keep most of the presents in the sleigh if you are having an open house just before Christmas and make a point of clearing the paper and ribbons right away after they are opened.

I know, I know...Christmas has been -- historically, traditionally, statistically and realistically -- a lousy time to try to sell a house. But things have changed.

Real estate professionals say it's also a time when focused second-home buyers -- especially a growing group of baby boomers -- scout around for their dream getaway. That's because some owners would rather sell and let the new buyers prepare for the colder months ahead.

Also, consumers sometimes forget that interest rates and fees for mortgages on second homes are usually as low as their primary residence. The best time to buy is during a buyer's market, and sometimes the winter brings out the willingness in sellers.

Whatever your situation -- potential seller, potential buyer, happy staying-put homeowner -- enjoy the holidays. Chances are, your house has never looked better.

If your home looks special, and you're considering a sale, let your agent bring in some potential buyers.

Put grandma in the car and show her the neighborhood lights.

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source: inman.com

Goodbye shingles, hello stucco

Q: We have cedar shingles on our home and love them. We had a difficult time finding someone to restore them until I mentioned it to a retired contractor. He had leftover oil preservative, which his son-in-law used to paint the shingles for $800. Now it's time to do it again.

However, our daughter and son-in-law are buying our home, and their friends said the ugliest thing about this house is the wood shingles. They think they will take the shingles down and put up stucco. Is that possible?

A: Beauty is in the eye of the beholder, and these friends seem to want to indulge their sense of beauty at significant expense to your daughter and son-in-law.

Replacing cedar shingles with stucco is certainly possible, but be prepared to part with a large chunk of change for the gargantuan job it will be to make the switch. We're always amused to see "friends" try to spend someone else's money. Although we're sure the intentions are good, the money sunk into stuccoing the house could be better used in other places.

You got the deal of the century with your $800 shingle treatment. Expect to pay more to do it again -- but replacing the shingles with stucco is exponentially more expensive.

The extra cost is in the increased number of steps and expert labor required in the stucco process versus the relatively few steps and less skilled labor required to treat the shingles.

Assuming the shingles are in good shape, the job is pretty simple. Clean the shingles with a pressure washer to remove any dirt and debris. Let them dry. Then spray or brush on another coat of preservative. That's it.

On the other hand, replacing the shingles with stucco is a multistep process requiring skilled labor.

Removing the shingles isn't rocket science, but once the shingles are off, the rest of the job should be left to the pros.

Each shingle must be pried off with a bar -- a flat shovel works well. Once off, the split shingles should be dispatched to the landfill. When all of the shingles are gone, the many thousands of nails and any building paper that remains stuck on the wood sheathing must be removed.

Start wrapping the entire house in 15-pound building felt. Make sure to overlap the courses so that any water that penetrates the stucco will be wicked away from the sheathing. Next, apply the lath. Stucco lath is steel mesh that is nailed to the sides of the house, over the building felt. If the lath looks like chicken wire, special nails equipped with a cardboard spacer are used to hold the lath away from the wall.

A perforated metal strip known as a weep screed is attached at the bottom of the wall. The weep screed performs two functions: It acts as a base for the wet stucco, and when the stucco is dry, allows any moisture to drain away from the wall.

Once the lath is on, it's time for the first coat of stucco, known as the scratch coat. Stucco consists of sand, lime, Portland cement and water mixed either by hand or in a mixer to the consistency of thick mud. A job this size requires a mixer.

The scratch coat is applied by trowel, which forces the wet stucco into the lath, forming "keys." The scratch coat should be approximately 3/8 inch thick. Once the scratch coat sets up, it's important to spray the surface intermittently with water so the surface doesn't dry too quickly. Slowing the curing process makes for a stronger job that is resistant to cracks.

Let the scratch coat cure for a day or two and repeat the process by applying a second coat of stucco, known as the brown coat. The brown coat should also be about 3/8 inch thick. The brown coat provides a flat uniform layer to apply the finish coat.

Allow the brown coat to cure for a couple of days, again spritzing it regularly, and then apply the finish coat. Color can be added to the finish coat and it can also be textured. When complete, the stucco should be about an inch thick.

A large stucco job is a messy process. Count on vegetation being damaged by dropped stucco, workman's feet and scaffolding. In addition, the wood shingle molding around windows and doors should be replaced with wood stucco molding. Stucco molding is milled with a groove to allow the wet stucco to "key" into the molding.

Replacing what seem to be perfectly good wood shingles with stucco is a huge and expensive undertaking. Absent a compelling reason to make the change, we'd counsel against it.

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source: inman.com

Seller-financing nightmare

Q: Back in 2003, my husband and I put $5,000 down on a house. We bought it for $65,000, and the owner set up an owner-financed mortgage for $60,000.

We made all of our payments on time in 2003, 2004 and 2005. But last year, our payments got a little off schedule. Then this year, in 2007, I bounced a check and we got behind.

The owner came to my house, and very rudely told me that we had to pay $200 per week, or $800 per month. I did it for a month. Then, I made nine more payments of $200, a payment of $185, two payments of $150, and a payment of $185.

Our regular payments were just $450 per month, so going then, to $800 per month was really tough for us. We then had another meeting with our seller who told us that even though we were caught up, he wanted us to keep paying that much each month.

We told him we couldn't afford it, so we settled on $500 per month. I said I'd still pay weekly, but then I missed a few weeks, although I made sure the $500 was getting paid within that month.

The seller got mad, and said paying once a month is not good enough. He told us that the interest rate on our loan is 8 percent, and the interest on our loan is $13 per day.

Now he wants us to pay $700 per month. I don't understand how he can do this. He owns a real estate company and is very wealthy. We heard he messed up two other families who live near us, but we didn't listen to him.

Since we got behind in our payments, he said he wanted the property back. Does that mean he is not going by the land contract we signed? Does that mean we are renting now?

I don't understand what's going on anymore. We hate to say goodbye to the $5,000 we put down, but we can't keep letting him raise our payments.

A: If I understand you correctly, your seller seems to be taking advantage of you. There are some important questions you need to answer: Did you rent the property or buy it? And, is your credit good enough to refinance with a conventional lender? If your seller is a very wealthy real estate investor, he probably has some expert firepower backing him up, such as an accountant or an attorney.

While you don't have much money, you need to hire a competent real estate attorney who can review your document and figure out if you even own this property. I can tell from your letter that your grasp of what you paid and what you still owe is rather loose. How much of each payments is interest and how much pays down the principal? Did the seller give you an amortization schedule showing you how quickly you'd pay down the loan? And, what interest rate was the loan set at?

Just so you understand, if you got a $60,000 loan today at 8 percent, you'd pay only $440 per month for a 30-year amortization payment. It sounds as though you've been paying this off a lot faster. If you paid an extra $200 per month, you'd pay off the entire loan in 13 years.

So, yes, it does seem that your seller is taking advantage of you and you need to hire someone who can discuss the situation with him in terms he understands. You also need to find out how much he says you owe, and you need to look into obtaining conventional financing to close out your deal with your seller as quickly as possible -- and the financing should not be from your seller, but with a legitimate mortgage company.

Q: My aunt sold my brother and me her house for $1 some eight years ago. She is now moving out of state to a relative's house and we are planning to sell the house. Will we have to pay capital gain tax?

A: The short answer is: Yes. You will have to pay long-term capital gains tax on the difference between the purchase price and the sales price, minus the broker's commission, transfer stamps, advertising costs, any other costs of sale and the cost of capital improvements you've made to the home, such as a new roof or new furnace.

If your aunt had held onto the property, and lived in it for two of the past five years as her primary residence, she would have been able to keep up to $250,000 in profits tax-free. Since the property is essentially an investment property for you and your brother, you'll have to pay long-term capital gains tax of up to 15 percent plus state tax on the profits.

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source: inman.com