The Fed chief, Bernanke, has come out with an outline including 4 key points that the Fed is proposing to avoid the mortgage crisis. All these 4 points are targeted more towards the lenders, as they are the ones who tend to get carried away for want of generating more and more business and end up offering risky credits to the much ignorant mortgage borrowers, who are unable to pay back.
The 4 points that Bernanke proposed are as follows:
Prohibit mortgage lenders from offering mortgage loans which borrowers cannot repay. The major part of crisis in the mortgage sector was the result of the way mortgage operators were offering loans. They offered complex loans to ignorant borrowers which initially had a low interest rate of repayment, and later went on to a much higher interest rate making it unaffordable to the loan borrowers to repay the loan amount and ultimately, their loans resulted in foreclosure.
Make lenders verify the income and assets of the borrower. All one required to borrow loans was a declaration that he has this much income and this many assets. No verification was done by the mortgage lender to ensure that whether the loan borrower really had that many assets and income. Hence, the Fed will tighten the verification process for lending to see whether the borrower with poor credit or insufficient income really have the ability to to repay a loan.
Require escrow accounts for higher-priced loans. For borrowers who do not understand the scope of repaying loans, the Fed suggests higher-priced loans have a separate account for real estate taxes and hazard insurance, which is standard in prime lending.
Ban repayment penalties including "loan-flipping. The Fed proposes to ban schemes in which lenders force borrowers to refinance at a higher rate that they cannot afford.
Hopefully, this will brng some respite to the industry in the long run. The less regulation a market has, the more prone it is for fallout. Lacking of asset checking and credibility checks and greedy mortgage lending practices were the main reasons for subprime mortgage crisis. | Table of Contents |
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