Saturday, July 12, 2008

No More Prepayment Penalties

One lure to get lenders of subprime mortgages was having a clause for a pre-payment penalty. Many consumers of these mortgages do not comprehend the meaning of the penalty. Some felt like they were not moving so the penalty was not of concern to them. Others probably never paid attention to it in the first place. Overall, consumers really did not understand the full terms of prepayment.

As an aside - how many Option ARM customers really understand their loans either? They probably just wanted to hear an affordable monthly payment number. During the bubble people were often told by realtors and mortgage brokers to focus on the monthly payment and not worry about the big numbers. Can you afford $XXX dollars? Yes, than this is the loan for you. Don't work about the other details. Another Great Housing Bubble attitude that has us in trouble today.

Today we find that the Government is (supposedly) working to bar these penalties. The article is brought to us from Bloomberg. Let's take a look

The Federal Reserve, in a bid to end abusive lending practices, will ban penalties on some high-cost mortgages that make it harder for people to refinance, a person familiar with the decision said.

The prohibition on prepayment penalties, part of a broader Fed response to the collapse of the subprime mortgage market, targets high-cost loans with interest rates that reset in the first four years, the person said. Rules also would limit charges when borrowers seek to pay off mortgages in the first two years on other types of high-priced loans, the person said.

The Federal Reserve Board of Governors will vote July 14 on a series of rules to strengthen protections for borrowers taking out subprime home loans. Lenders use prepayment penalties to discourage borrowers from refinancing their loans and can trap borrowers in loans they can't afford, consumer advocates said.

Some points to make so far - this is a proposal. What actually passes can still change. And what actually gets implemented can morph even more. Also, the article does not state when the proposal would go into effect, what the penalties for lenders who violated the new terms would be, and if the plan would be retroactive to alleviate some of the current problems. But at least they have a proposal, right? Let's read on -

Dodd had criticized the Fed for not going far enough in its proposal in addressing prepayment penalties when the central bank proposed its rules.

``It raises serious questions as to whether the Federal Reserve is the appropriate institution to house consumer- protection functions,'' Dodd, a Connecticut Democrat, said in a December statement.

In May, the Fed proposed rules to prevent ``unfair and deceptive'' credit-card lending by limiting fees and interest- rate increases. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, had prodded the agency to use its authority under the Federal Trade Commission Act to ban ``unfair or deceptive acts or practices.''

Reading the article it seems that there are many proposals that get publicity but never really get implemented. It seems like a Fed bait and switch program. Announce great plans to help consumers, get headlines, then just let the plans fade away. People really do not understand the full impact of having the prepayment fees. And the lenders have the discretion to waive the fees, Wachovia is. Mandatory waiving of fees is basically taking money out of the lenders pockets. So far most of the changes have been voluntary. Will this really work? We will have to wait and see.

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