From the LA Times:
Starting this month, federally chartered lenders are being discouraged from qualifying buyers based on the low starter rates, when only the interest or a portion of the interest is due. Instead, they are being urged to evaluate the borrower’s ability to pay for the loan at the full rate.
Regulators are trying “to add some discipline to the lending process,” said Richard Wohl, president of Pasadena-based Indymac Bank. “Whenever you do that, you’re going to have some [borrowers] that won’t have the product available to them.”
The tougher standard was issued in the form of “guidance” from the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Reserve and other regulators. Guidance has less force than a regulation and provides no specific penalties for violation.
The regulators, however, say they will “carefully scrutinize” lenders to see whether they are following the new rules. Those who fail to do so, the guidance summary warns, “will be asked to take remedial action.”
In addition, the guidance applies only to federally chartered lenders, including Indymac, Countrywide Financial Corp., Washington Mutual Inc. and other behemoths. State-chartered banks, which are smaller but more numerous than federal banks, are not affected.
…
Kathy Dick, deputy U.S. comptroller for credit and market risk, said interest-only loans and option ARMs originally were for a minority of savvy, well-off people whose income was variable — the self-employed and those who worked on commission or were paid intermittently.“Now they’re used to get someone into a home without a real analysis of their ability to pay,” Dick said. “Lenders are qualifying people for homes they can’t afford. We felt that wasn’t consistent with prudent lending principles.”
…
Dick demurred on offering any prediction about how the new rules would affect the housing market. Because the guidance applies only to federally chartered lenders, it raises the possibility that it would merely move some loans from one segment of the market to another.“It’s too early to tell what the impact will be,” Dick said. “But from our vantage point, looking at national banks, we don’t see any evidence this is going to cause … a major problem.” Others made bolder predictions.
“Just as the loosening of credit standards made the housing bubble go higher and last longer, the tightening of standards is going to make it deflate further and faster,” said Michael Calhoun, president of the Center for Responsible Lending, a research and advocacy group that fights predatory lenders. As borrowers find they qualify only for smaller loans, Calhoun predicted, sellers will have to cut their prices.
The market giveth, the market taketh.
When I see language such as “discouraged”, “urged’, “discipline ” and “guidance”, I get the feeling that this thing doesn’t have enough teeth. With the enormous sums being pushed around, there are simply too many reasons to find another way to get the money to the market.
Insights from any of you financial guys?
lisoosh, i’m with you. what is the precendence of ‘guidance’ to charted lenders?
the reason why it may have ‘teeth’ however is that the fed reserve issued the guidance also… and they hold the lid to all the candy in the candy drawer.
candy jar that is… getting coffee imed.
Mental Mastur……!!!!!!!!!!
The article is confusing to say the least. The interagency guidance does apply to state-chartered banks, and also to credit unions.
What these guidances don’t apply to are non-depository lenders, i.e., they don’t apply to non-banks, which are subject to regulation by state agencies.
It is widely expected that state regulators will issue similar guidance in the near future.
jb
if anything the press about the arm/io loans may open some eyes and stop people from getting into these type loans
i expected much more from this legislation but it was government i was depending on. silly me
This “guidance” seems rather disingenuous to me. What is the point of coming out with such guidance well after the horse has left the barn? If the Fed were truly concerned about this, they would have come out with this guidance years ago when it was well apparent that banks were playing fast and loose with their qualification practices. Since everybody was making money then and the practice helped infuse cash into a post-9/11 economy, the Fed turned a blind eye and to this practice. The Fed, in effect, gave it’s tacit blessing to the practice. Now that the chickens have come home to roost, the Fed wants to chime in warning against such lending practices. Sounds to me like they are simply trying to give themselves political cover. If it is a poor lending practice now, it was a poor lending practice then. Seems to me the Fed needs to clarify who it owes it’s fiduciary duty to.
Zzzzz….
Wake me up when ALL the States issue similar “guidiance”. That the time the spigot is closed off.
IMHO, one other possible reason why “guidiance” would be effective is that class action lawyers can use it as evidence, so bankers leagal departments curtail their sales departments. Sales departments obey or get fired.
What was the result of the predatory lending guidelines issued last year? Successful/Unsuccessful/No results?
http://www.occ.treas.gov/cdd/newsletters/summer05/cd/areviewofocc.htm
I think more information is better here, and that many community banks might at least slap the recommended consumer communications into their loan app somewhere. The sample communications at the end of the Federal Register specifically addresses some of the statements FB’s have been making in the media about how “we didn’t know!!.”
OCC 2006-41, Nontraditional Mortgage Products: Guidance on Nontraditional Mortgage Product Risks http://www.occ.treas.gov/ftp/bulletin/2006-41.html
I believe SOX will put pressure on public lenders to follow guidance.
I don’t think any CEO is going to want to sit in front of a Congressional hearing and try to explain why his institution decided they should be exempt from following federally issued guidance.
jb
Yes to SJ Observer, the legal ramifications do provide fodder for consumer claims. Also, safety & soundness examinations have always concentrated on collateralization, and a lot of banks have worries about those 20s. Banks will tighten because median prices are headed south. So if you are worried about your collateralization, you will be very careful to adhere to those guidelines on the theory that it may buy you time.
JB, there has been nothing at all preventing states from issuing those guidelines before – why haven’t they? One reason is that everyone was making money off of it, and another reason is that there’s a lot of money floating around in campaign contributions.
How many states have restricted payday lenders and title-pawn shops? Heh, indeed. Don’t hold your breath.