Earlier, I wrote about banks' absurd push to bring back interest-only mortgages. Subsequent to that, I read the delightful news that California is coming to its senses regarding mortgage origination. The Los Angeles Times reports that Gov. Schwarzenegger signed a number of new mortgage laws late last night. I'd like to highlight several of these new rules, which I think the entire nation should embrace.
AB 260 ... tightens restrictions on mortgage brokers so they cannot steer borrowers to riskier, higher-interest loans when they qualify for less-expensive ones.
... bans so-called negative-amortization loans, which offer the option of monthly payments so low that the loan amounts can actually grow over time.
... limits prepayment penalties to no more than 2% of the loan balance and allows state regulators to enforce federal lending laws.
I like all of these changes. First, mortgage brokers should be working in the borrowers' best interest. Clearly, they're out to make a profit, and that's fine. But that profit should be based on originating sound loans, not by tricking borrowers to take on risky mortgage products that ultimately fail.
As for those negative-amortization loans, they're perhaps the most dangerous kind of mortgage. I think one way to determine whether or not a new mortgage rule is a good idea is to try to figure out a reason why someone might legitimately object to it. I can't think of any reason why a responsible borrower would ever need a negative amortization mortgage. That just puts a homeowner in a precarious situation once the principal has to be paid.