Mortage regulators now plan to start regulating!

It may be a few years too late, but federal regulators are finalizing some new rules for mortgage lenders that would largely eliminate some of the loopholes with qualifying borrowers for adjustable rate mortgages as well as make it easier for them to refi into loans less onerous. From an L.A. Times story:

On Monday, the Federal Reserve is expected to require lenders to document borrowers' incomes and verify that they can afford their mortgage payments -- including the higher payments that come when adjustable-rate loans reset...

First proposed in December, the measures have been revised in recent months in response to public comment. Fed officials declined to describe the changes, but the regulations also are expected to limit bonuses paid to brokers for making subprime loans and restrict prepayment penalties for borrowers who want to refinance...

Some of those new rules also may include restrictions on the use of the word "fixed" to describe the rate of a loan that may adjust in the future and prohibitions on brokers influencing the appraised value of homes.

Lenders also may be required to give borrowers at least 60 days before their loan rates reset, a period during which they can refinance without penalty.

Paul Leonard, director of the California office of the Center for Responsible Lending, said that many of the federal rules, as originally proposed, were too weak. For instance, he noted that some of the practices proposed by the Fed would apply only to subprime loans but not to other nontraditional mortgages, including so-called no doc and interest-only loans that also have high rates of default...

On the other hand, the Mortgage Bankers Assn. has expressed concern that the new rules could impose burdensome requirements on lenders that would result in higher costs for borrowers...

Also Tuesday, California Gov. Arnold Schwarzenegger signed into law a bill that represents the Legislature's first stab at trying to stem the tide of foreclosures.

The bill, which took effect immediately, requires lenders to give homeowners an early warning that their mortgages are heading toward default. The measure also gives renters an extra 30 days' notice to find a new place to live if their landlord is losing the property.

"Foreclosures not only devastate families, they hurt neighborhoods and depress our economy and our budget," Schwarzenegger said.

The bill by Senate President Pro Tem Don Perata (D-Oakland) also provides communities with a new weapon to combat blight created when homes are allowed to run down after being vacated. Local governments can now fine property owners who fail to maintain empty homes.