Say Goodbye to Pre-Payment Penalties?

This news from NAR (National Association of Realtor's caught my eye today:

To address subprime mortgage woes, House Financial Services Committee Chairman Barney Frank (D-Mass.) is expected to put the finishing touches on legislation upping underwriting standards for all mortgages, prime and subprime. In a main focus, the bill would subject mortgage originators (lenders and brokers) to rules similar to those that apply to depository institutions. The new rules would subject originators to a licensing requirement and prohibit loans to consumers who have no reasonable ability to repay. NAR has been working with Rep. Frank's staff to incorporate its Responsible Lending Principles into the bill, among them a prohibition on prepayment penalties, which critics say can trap borrowers in loans they can't afford.

Separately, NAR will continue to tout FHA reform as a much-needed antidote to the abusive subprime loans that have rocked mortgage markets. The reforms have bipartisan support in the House and the Senate but progress is slowed as lawmakers look at whether a national housing trust fund should be passed as part of the bill. Along with FHA reform, NAR is calling for the federal government to let secondary mortgage market giants Fannie Mae and Freddie Mac temporarily hold more loans in their portfolios than they're currently permitted. Such a move would help calm markets by signalling the companies' commitment to ensuring continued liquidity for lenders' mortgage businesses.

While I am more than a little wary that Government regulation might cripple people chances of getting loans there is no doubt that pre-payment penalties are a bad thing. It puts homeowners in a lose-lose situation way too often.

Here's more of the release:

President Bush Announces Support for FHA Reform

NAR applauded President George W. Bush's statement of support for programs that would give home owners greater flexibility to refinance their loans through the Federal Housing Administration. NAR has been advocating regulatory changes to the FHA program to help families keep their homes in light of the decline of the subprime market and impending interest-rate adjustments. In a press conference last week, President Bush signaled his support for such an effort in “making sure that financial institutions like the FHA have got flexibility to help these folks refinance their homes.” At present, FHA programs do not allow home owners to refinance if their mortgage is in jeopardy.

NAR Urges New Regulations to Combat Deceptive Lending

The financial markets are struggling with the results of abusive lending practices in the subprime market, including the collapse of several investment funds and the failure of more than 100 subprime lenders, noted NAR in a letter to the Federal Reserve. NAR urged the Board to adopt regulations that combat unfair, deceptive, and abusive mortgage lending acts and practices. Among its recommendations: NAR asked the Fed to eliminate prepayment penalties for all categories of mortgages or to bar prepayment penalties for subprime mortgages and other mortgages where abuses are found. NAR also urged the Board to require that subprime lenders mandate an escrow reserve for taxes and insurance.

It will be very interesting to see if the Fed acts on these two issues. These would have a far greater impact in terms of helping borrowers than other protectionist measures in my opinion.