Mortgage Confidential: Fed's new sub prime rules will have little effect

Late last year, the Fed approved some new mortgage guidelines as part of a broad effort to fix the housing woes. These guidelines, aimed at the sub prime mortgage industry:

• Requires lenders to determine the borrower's ability to repay a mortgage loan by using the highest potential mortgage payment during the first seven years of the loan.
• Ban "no verification" loans -- meaning lenders must now verify both income as well as assets.
• Ban prepayment penalties if the payment could change any time during the first four years of the new loan.
• Require insurance and tax escrow accounts, called "impound" accounts in many parts of the country.

There. That will fix those mean old sub prime lenders. No more sub prime lenders making bad loans to people who can't afford them. Yeah, that'll teach 'em. The problem is, just exactly who will these new rules apply to, hmmm? I don't see any sub prime lenders, they're all out of business. Went away last year. Can anyone say, "too little, too late?"

Hey, I'm as cynical as the next guy, but these rules needed to be in place five years ago when sub prime lenders began testing waters they never swam in.

Sub prime mortgages have been around for years, when the interest rates on those loans were higher than conventional and government notes to offset the additional credit risk. But even then, sub prime loans required some down payment. Depending upon the credit grade, sub prime loans could require 20% or more down. I can pick out lots of areas in our country right now that could have benefited from requiring 20% down, at least someone can refinance when values drop.

But these new rules won't help anyone because there are no sub prime lenders to be found. Okay, there might one or two left, but the sub prime mortgages they offer look more like a regular loan and are nothing near to what they used to be one, two or even 10 years ago.

It's easy to look in the rear view mirror, we all do it. But the fact is that the horse already left the barn on this one some time ago. I watched the Fed announcement on these new rules and was just wondering how much those committee members got paid to come up with rules like, "Make sure they can afford the loan." Goodness gracious.

Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.