The act mortgage reform and anti predatory lending

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the Act, “Mortgage Reform and Anti-Predatory Lending Act”, attempts to do this by applying minimum underwriting standards for mortgages, including: (i) prohibitions on steering incentives for mortgage brokers (i.e., payments to brokers for selling specific types of loans); (ii) restrictions on prepayment penalties; (iii) restrictions on high-cost mortgages; and (iv) a requirement that lenders make a “reasonable and good faith determination” that borrowers have a “reasonable ability to repay” the loan that they are taking out. There is an exemption for “qualified residential mortgages”, which has yet to be defined, but most likely means conforming mortgages. While aligning incentives is an admirable goal for the nonconforming mortgage market, as we have argued elsewhere, it was probably not the problem in the financial crisis. As described in Chapter 3, no one can accuse the Godzilla GSEs and their King Kong too-big-to-fail private counterparts from not having had enough skin in the game (but, of course, they did not have enough capital to cover their skin). 67 Moreover, the Act goes on to describe the basis for determining whether the borrower can pay, including typical features such
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124 as credit history, income, and their current obligations, as well as income verification and the type of loan if nonstandard (such as variable rate, interest-only, negative amortization, etc.). In light of all the difficulties in trying to manage the mortgage risk at the financial institution level, it is hard to argue that a reduction in predatory lending and higher underwriting standards would not improve the securitization process. But it should be understood that these provisions will almost certainly reduce the availability of mortgage credit and/or increase its price. Nevertheless, there is little doubt that some types of nonconforming mortgages could be economically viable, even at higher mortgage rates. We believe that it would be a shame if the best practices of the subprime market did not re-emerge -- i.e., providing credit to the self-employed who may fall outside the scope of conforming mortgages. Direct stipulation of underwriting standards might straitjacket originators, who through innovative contractual and monitoring mechanisms or simply different credit terms, such as requiring a higher down payment, could provide prudent mortgage finance to niche markets. Nevertheless, almost surely, the Dodd-Frank Act necessitates a smaller mortgage finance market, pushing potential homeowners towards the rental market. And this may not be all that bad. The next chapter discusses the economics of homeownership and, more specifically, the large number of subsidies that are provided by the U.S. government to this market.
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125 Chapter 9: Chasing the Dragon “In this context, it’s especially disturbing that the Bush administration has announced that it is cutting back Section 8 housing vouchers, which provide rental assistance to low income families, while easing restrictions on mortgage loans. Low-income families will now be able to
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