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‘Exotic’ loans to fetch premium prices

New lending rules punish disadvantaged borrowers

The federal government in the "Restoring American Financial Stability Act of 2010" reversed its long-standing policy of favoring disadvantaged borrowers. Under the new rules, borrowers who can qualify only for mortgages with relatively liberal repayment provisions, which are already priced higher because they are riskier to lenders, will be subject to an indirect cost that will affect only them. This unintended effect arises from new restrictions imposed on mortgage lenders, combined with a "safe harbor" where lenders are not subject to the restrictions.Lenders are in the safe harbor when they make "qualified" mortgages, which are those with low-risk characteristics, such as fully amortizing payments, terms no longer than 30 years, qualification based on the highest possible rate in the first five years, and so on. Disadvantaged borrowers who need lower payments in the earlier years will require nonqualified mortgages. The new burdens imposed...

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