US Federal Reserve chairman Ben Bernanke said today that the central bank was proposing new rules to clean up mortgage lending which are also aimed at protecting US home buyers from potential fraud.
The Fed is racing to tighten up the rules governing home loans amid one of the worst US housing slumps in decades, which has been worsened by a surge in home foreclosures.
'We are meeting today to discuss proposed regulatory amendments to protect consumers from fraud, deception, and unfairness in the mortgage market,' Bernanke said in a statement.
Some of the proposed rules specifically address sub-prime mortgages granted to Americans with patchy credit. Defaults on sub-prime mortgages have been responsible for hundreds of thousands of home foreclosures this year and government agencies are probing mounting reports of mortgage fraud.
Bernanke said 'market discipline' had broken down in some cases during a years-long housing boom which has been followed by an almost two-year long housing market downturn.
The Fed said it was acting because the mortgage market and its financing had become more complex and multi-layered in recent years. Officials said the proposals would not significantly affect mortgage availability.
The proposals affecting sub-prime home loans would bar a lender from granting a mortgage without assessing a borrower's ability to repay the loan from sources other than the home's value.
Some lenders offered so-called 'no doc' loans during the housing boom, enabling people on low incomes to get on the property ladder, but 'no document' loans make it difficult to determine a borrower's true financial health.
The sub-prime proposals would also prohibit a lender from issuing a loan without verifying a borrower's income and assets.
Regarding non-subprime loans, the new rules would stop lenders from paying mortgage brokers a fee to market higher-rate home loans, as well as barring a creditor or broker from coercing a home appraiser to misrepresent the value of a property.
Other proposals would stop banks and lenders from advertising a mortgage interest rate as 'fixed' when the rate is not truly fixed over the term of the loan.
The Fed is acting as a housing slump has seen numerous mortgage firms and lenders go out of business, especially in areas such as Florida and California that have borne the brunt of the downturn.
Some economists fear the housing meltdown and multi-billion dollars losses announced by major banks on their mortgage investments could derail wider US economic growth.
The Fed announced its proposals as the government reported that US home construction fell 3.7% in November, partly as single-family home building dropped to its lowest level in more than 16 years.
The proposals will be open to industry feedback before being finalised by the Fed which regulates US banks and lending institutions.
