Thursday, August 16, 2012

New appraisal rules for high risk mortgages

The Globe reports today that the Consumer Financial Protection Bureau has just issued draft regulations that if enacted will require lenders to obtain at least one appraisal for mortgage loans that carry a high rate of interest (meaning that they are riskier than most loans).  Until now, there has been no requirement that an appraisal be obtained despite it being a prudent business practice.  This appraisal requirement is part of a series of steps such as mandatory credit counseling and prohibitions on predatory practices contained in these new regs.

During the past decade's housing collapse, many of those making these kind of loans had plenty of incentives to make them as risky as possible: originators were paid up front; the larger the loan and higher the interest rate the more they were paid; and they incurred no penalty or loss if the loan went bad.   With that as the recent track record of the national lending industry, it's not unreasonable for the government to use its regulatory power to alter these incentives in a way that's more balanced towards the borrowers and the communities in which there properties are located.

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