WASHINGTON — After moving Sunday to quell growing doubts about the stability of housing giants Freddie Mac and Fannie Mae, the Fed on Monday adopted new rules to protect home buyers from shady mortgage-lending practices.
Both actions reflect a more aggressive regulatory zeal at the Federal Reserve Board, which has been criticized for allowing the nation's housing market to overheat and ultimately embrace dangerously unsound practices that helped trigger the ongoing foreclosure, lending and credit crises.
But neither move improved the stock markets outlook on the banking sector. Shares of Fannie Mae slipped 18 cents to finish at $10.08, while Freddie Mac shares dropped 66 cents to finish at $7.09. Banking stocks in general were also down.
The new rules will protect home buyers from deceptive, unfair and abusive lending, establish new advertising standards and require lenders to provide clearer disclosures of loan terms earlier in transactions. But they won't kick in until Oct. 1, 2009, and will cover only future loans, not current ones.
Federal Reserve Board Chairman Ben Bernanke said the new regulations would help keep credit readily available for qualified borrowers and would apply even to nonbank mortgage lenders and mortgage brokers, neither of which the Fed supervises.
"Besides offering broader protection for consumers, (these) rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers," Bernanke said.
On Sunday, the Fed gave the Federal Reserve Bank of New York the authority to lend money to mortgage financiers Fannie Mae and Freddie Mac if it becomes necessary. Any loans to the companies would be collateralized by the federal government and U.S securities.
Fannie Mae and Freddie Mac collectively hold or back some $5.3 trillion in mortgage debt, which is roughly half of the nation's mortgages.
House Majority Leader Steny Hoyer, D-Md., applauded the Fed's move to reassure investors by making money available to both companies quickly if necessary.
"While I do not expect that it will be necessary for (Freddie Mac or Fannie Mae) to draw on additional liquidity or capital provided by the Treasury Department or the Federal Reserve, their demonstrated willingness to act should help to build confidence," he said.
Rep. Jeb Hensarling, R-Texas, the chairman of the Republican Study Committee, is requesting full committee hearings and debate on any proposal to provide direct federal assistance to Fannie Mae and Freddie Mac, citing the potential exposure of taxpayers to more than $5 trillion of risk.
Many of the new consumer-protection rules target loans to "subprime" borrowers with poor credit histories. These borrowers, who typically pay higher home-loan costs because they pose a greater risk to lenders, frequently were targeted for abusive practices and have borne the brunt of the growing home-foreclosure frenzy.
The new rules forbid lenders from making "higher-priced," or sub-prime, loans without proof of borrowers' ability to repay the loans from income and assets other than the homes' values.
Creditors must verify borrowers' incomes and assets and establish escrow accounts to assure that these borrowers pay their property taxes and insurance. The rules restrict lenders' ability to impose penalties on risky borrowers and others who pay off their loans early.
The new rules don't ban the practice of paying bonuses to mortgage brokers that steer borrowers into higher-interest loans even if they qualify for lower-interest loans. The Fed had proposed disclosing the so-called "yield-spread premiums" to borrowers in advance. But its research showed that borrowers often were confused by the information and didn't always make sound decisions based on the disclosures.
Consumer advocates wanted the practice banned. Instead, the Fed left the issue open for further study and possible action later.
"The Fed should be applauded for at least stepping up to the plate, but if this had happened five years ago, we probably wouldn't have had a sub-prime crisis," said Kurt Eggert, a law professor at Chapman University in Orange, Calif., and a former member of the Federal Reserve Board's Consumer Advisory Council.
Many of the deceptive mortgage-lending practices involve mortgage brokers and nonbank lenders that are regulated by state agencies whose spotty oversight helped fuel the foreclosure crisis. These agencies will be asked to enforce the new federal rules.
Marc Savitt, the president of The National Association of Mortgage Brokers, lauded the new rules as "a clear victory for consumers" that "promotes clarity and professionalism throughout the industry."
On loans to less-risky borrowers in the "prime" market, the new rules bar creditors and mortgage brokers from conspiring with appraisers to misstate homes' values. Creditors also must credit loan payments the day they're received and provide payoff statements in a timely manner upon request.
New advertising rules require more information about interest rates, monthly payments and other loan terms. They ban numerous misleading practices, such as claiming a rate or payment is "fixed" when it can change.
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