What do you think? Leave a respectful comment.

The video for this story is not available, but you can still read the transcript below.
No image

Fed Backs New Rules Aimed at Curbing Risky Home Loans

The Federal Reserve proposed new mortgage regulations Tuesday that would help protect home buyers from shady lending practices following losses suffered in the risky "subprime" home loan category. A Wall Street Journal reporter looks at the recent mortgage crisis and how the new Fed rules may prevent future subprime problems.

Read the Full Transcript


    The mortgage crisis and today's action by the Federal Reserve. Greg Ip covers the Fed for the Wall Street Journal.

    Greg, welcome.

  • GREG IP, Wall Street Journal:

    Hi, Jim.


    The Fed's rules today, they're designed to stop what have been called "shady practices," correct?

  • GREG IP:



    What were those practices that they are now designed to do away with?

  • GREG IP:

    Let's touch on a few of these, Jim. It was very common in the heyday of the subprime mortgage market that a person would take out a mortgage at, say, 7 percent, and that seemed like a good rate, except that it was going to adjust higher to, say, 11 percent a few years later. And when that time came for adjustment, they actually would have to pay a very large penalty in order to get out of that mortgage. The new rules say: No penalties for getting out of that mortgage before the rate goes up.

    It was also very common for brokers who were very anxious just to generate a lot of volume to give mortgages to people who really couldn't afford them out of the income they were earning. And they reasoned, "Well, if they have trouble repaying the loan, they'll just refinance, because after all home prices always go up."

    Well, since then, we've learned that, in fact, home prices also go down. And we want to — or, I should say, the Fed wants to make sure that people can pay the whole mortgage out of their income.


    And before there was no real restriction on anybody's income. In other words, they didn't match person's income with what their payments were going to be.

  • GREG IP:

    That was quite common, yes, to issue mortgages that would consume 60 percent of a person's income, which is far higher than would normally be permitted, say, for example, a prime customer.

    And not only that, Jim, but it was also common to not even require the borrower to provide any documentation, like a W-2, proving what income they earned. These were so-called no-doc or low-doc loans.


    So if somebody said, "Hey, I make $75,000 a year," they just took their word for it?

  • GREG IP:

    That's right. The broker said, "No problem. If you're lying, not my problem. That's the problem of the person who ends up owning the mortgage." And that will no longer be…

The Latest