Shady Lending Practices Lead To Record Foreclosures

July 16th, 2008 · No Comments

The feds are all set to curb the shady lending practices that lead to record foreclosures. The aim is to give as much protection as possible to borrowers from predatory lenders.

Ben Barnanke and his colleagues will soon give their nod to a plan that will come down sharply on questionable lending operations that has hurt innumerable sub-prime borrowers. Willy-nilly loans were given out to those without stained credit history or modest incomes.

According to the new plan the lenders will not be allowed to penalize borrowers for paying off loans ahead of schedule. Lenders from henceforth will have to ensure that the borrowers make provisions in the contract for payment of taxes and insurance. Lenders will be barred from sanctioning loans without checking the income proof of the loan applicants. The lenders will have to see that the lenders are in a position to pay off the loan with interest from income other than what is generated by the house in question. Misleading advertisements about the types of mortgages will have to be curtailed. Everything must be above board with borrowers.

The consumer advocates are unhappy with the plan for it being too soft. Lenders on the other hand think they are overly harsh. It will limit the number of people who will qualify to avail of mortgages. With financing being made difficult the number of buyers will not increase and this will harm the real estate market.

The feds are faced with the falling confidence of the investors. It is having a negative impact on the two giant companies, Fannie Mae and Freddie Mac that are government backed. They are backing $5.3 trillion mortgage debts – half of the delinquent mortgages in America. The Feds together the Treasury Department are trying to find out means of bolstering up these two companies. If either one of them fell it will be a deadly blow for the already stumbling real estate market. Mortgages would get even more difficult to avail of, as interests will inevitably rise.

It will take some time to gauge if the new rules are having any effect and reducing number of foreclosures, because there are hardly any buyers in the market. The good side is that many of the shady mortgage operations fell with the sub-prime meltdown. The general opinion is that this plan will prevent future foreclosure crisis like the one reigning right now but it will do nothing for those already in the foreclosure net.