WASHINGTON — June 27 marked a turning point in the continuing tale of woe in the subprime mortgage market, with federal regulators issuing new rules that go into effect immediately.
The new rules require banks to make more disclosures, limit prepayment penalties (70% of subprime loans made in 2006 imposed these penalties) and the use of "stated income" loans (for which borrowers' income is not verified, and 50% of subprime loans in 2006 were made on undocumented income) and also give borrowers a complete picture of the life of the loan. Left out is a "suitability standard" to make sure the consumer gets the best loan for their situation.
The biggest loophole, however, is that the rules do not apply to mortgage brokers, who originated nearly two-thirds of all subprime loans in the latter half of 2005, during the height of the real estate market, which are now repricing.
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