From CBS Marketwatch:

The new rules, effective immediately, are for adjustable-rate mortgage products that can cause payment shock. These loans start off with low “teaser” rates that balloon, and end up being more expensive than borrowers initially anticipate.

The new rules call for banks to beef up their disclosures, limit prepayment penalties, limit the use of “stated income” loans, and include a fully indexed, fully amortized qualification for borrowers.

The new rules do not include a “suitability standard.” So borrowers will continue to be responsible for making sure that they choose appropriate loans for their needs and circumstances.

Actions like these, as reasonable and sensible as they seem, will continue to exert downward pressure on the housing market, as many of the looney loans taken out during the housing bubble worked to increase housing demand and expand credit generally. Watch for further fallout and individuals further act to clean up the excesses created during the historic credit bubble that is only now beginning to pull back.

(One thing to note is that the due diligence of the free market is altered when borrowing rules are dictated by federal authorities. In a perfect world, borrowers and lenders would be responsible for their own personal due diligence and the government entity would simply enforce contracts and investigate fraud.)

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Filed under: Politics, Social Mood, Economics