BREAKING NEWS!!!!
By Denise Wiese
BREAKING NEWS!!!!!!!!!!!!
Balloons of less than 7 years ARE permissible with Higher Priced Mortgage Loans
The Federal Reserve Board recently issued clarification (Consumer Affairs letter CA 09-12) that lenders CAN make balloon loans of less than 7 years! The answer to question #2 states, "If the board had intended to ban these products (balloon loans with a maturity of less than 7 years) it would have done so explicitly". Their intent was for bankers to engage in prudent underwriting to consider such things as the loan-to-value ratio and the borrower's debt-to-income ratio to evaluate the borrower's future ability to repay or refinance the loan. The letter further clarifies this issue in the answer to Question #4 which states, "A borrower with a high debt-to-income ratio, and/or with little or no equity in the property, will be less likely to be able to refinance the loan before the balloon payment comes due than a borrower with lower debt-to-income and loan-to-value ratios". Additionally, a bank is not required to predict the consumer's future financial circumstances.
While this is good news, this guidance would have been much more helpful prior to October 1st. Many financial institutions have already spent unnecessary time updating loan policies and providing training to their lending staff. This is a perfect example of how the regulators are being pressured by Congress to push these regulations out so quickly that they don't have the time to think through all the issues. Don't think that this will be the only time this happens. It's a sign of the times.