Common Sense comes to the Fed

The Federal Reserve issued a proposal today to amend the Truth in Lending Act (part of Regulation Z). Among the removal of incentives to take advantage of “high-priced mortgages” (aka, subprime) borrowers, the Fed is now saying home price appreciation cannot be the basis for issuing a loan. Quoted: “Prohibit a lender from engaging in a practice of lending without considering borrowers’ ability to repay the loans from sources other than the home’s value.” During the first half of this decade, home price appreciation was the only basis for issuing most subprime loans.

The Fed defines high-priced as 3 percentage points above a treasury bond with the same maturity. I assume this means a 30 year treasury bond for a 30 year fixed rate mortgage and 6 month treasury bill for a 6 month ARM, but I don’t know.

I won’t retype the details because the Fed outlines them in “Highlights of Proposed Rule to Amend Home Mortgage Provisions of Regulation Z”
and the Federal Reserve Press Release.

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