Apparently, a day of doom is scheduled for July 22, 2007 (next Sunday).

The cause: non-traditional loans.

Here’s the details (simplified as best I can):

According to Lou Barnes, mortgage loan broker and syndicated columnist, last year, “the Federal Reserve (joined by all other banking regulators) issued a “guidance” on nontraditional mortgage risks.”

Basically, the “guidance” said, if you decided to take out a loan that was interest-only, or one that was negative-amortizing, you’d have to qualify (today) based on what you’d be required to pay (in the future) once the loan reset, five-to-ten years from now.

Although the new rule went into effect last September, no one paid it any attention.

This coming Sunday, however, underwriters will be forced to comply, if they plan on reselling their loans on the secondary market.

Now, the new rule might sound logical, on the surface, right? I mean, these types of loans are what got us into this mess, right?

Well, not really. Plenty of people who take out these types of loans can afford to keep making payments on them, or had planned all along to refinance into new, non-fixed payment loans once their initial loan periods were up.

However, with the new rule, these “good” borrowers will be stuck – they won’t be able to refinance, because they won’t qualify for new, non-traditional loans.

[T]roubled borrowers trying to refi off their subprimes or other re-setting ARMs into interest-only loans to minimize payments will be out of luck.

Add to that the rising foreclosure count.

Also out of luck, the millions who planned defined ownership periods, safely using 7- or 10-year interest-only loans.*

Then the families with solid but unpredictable incomes (sales or seasonal, for example), for whom an option ARM was a godsend … the Fed and its pinched pals just made your lives riskier.

And, while the new rule will mean less risk for lenders and for some of their clients, the unfortunate effect of the new guideline is that any new borrower who wants (or needs) to take out one of these loans, and can very well afford to do so, will no longer have the option.

This new set of criteria is going to diminish purchasing power among the worst-possible group, the “A”-quality borrower. Some of the diminution will be subtle: if approval for an interest-only or option loan is not available, and a price range therefore out of reach, many buyers will step out altogether.

Which means the housing market will be in trouble, even longer.

Instead of taking a “meat-ax” to the problem, Barnes suggests several alternatives:

* You [The Fed] might have banned “no-doc” underwriting of any loan with less than 20 percent down;

* You might have banned stated-income underwriting for any loan with less than 10 percent down, and for any interest-only or neg-am structure;

* You might have limited rate adjustments for any loan with a fixed-rate interval shorter than five years, and likewise confined them to lower loan-to-value ratios;

Then stopped for a few months to see what happened.

Read more: New loan guidance wrong for housing – By Lou Barnes, Inman News, by way of The Boston Globe

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