The Federal Reserve said Tuesday it would soon allow banks to lend on underwater mortgages and said it would also begin allowing them to lend to borrowers with “subprime” credit scores.
In a move that could put more homeowners at risk, the Federal Reserve on Tuesday also approved a plan to create a new type of underwater loan program that will allow borrowers to pay interest rates closer to the normal mortgage rate, with lower down payments.
The plan was to be introduced on Jan. 18.
“It’s the next step in a long process to ensure that the market conditions that created these subprime borrowers will not persist,” the Fed said in a statement.
“The FOMC will use the review of this proposed rulemaking to take additional actions to address the concerns raised in this matter, including: The FED is taking additional steps to help prevent the risk of subprime mortgage origination in the future.”
The Fed also announced that it would hold a two-day meeting of the Federal Open Market Committee (FOMC) on Wednesday.
The plan is expected to be approved at a meeting on Thursday.
The Fed is also expected to announce that it will continue to use the term “subpar” as a benchmark for lending standards in the next several months.
However, the Fed has already used the term a few times in recent months.
On Feb. 13, it said it was moving to extend a rule that allowed borrowers with subprime credit scores to get more money in mortgage refinancing under certain circumstances.
On April 11, the FOMS board also approved an initiative that would allow banks and other lenders to offer mortgages with higher interest rates.
According to the New York Times, the change would allow lenders to give mortgages with a higher down payment at a lower rate than those with a lower down payment.
A week earlier, the FOMS said it had extended an initiative aimed at helping low-income families that allows them to buy mortgages with interest rates lower than those they would otherwise pay.
While some analysts have predicted a rise in defaults on underwater mortgage loans, others argue that the FED could have been more aggressive.
Under the proposal, borrowers would be able to refinance loans for a “subsidy” of up to $150,000, which would be used to help them pay for the interest on the loan.
Some analysts said the move would help to prevent borrowers from defaulting on their mortgages, but others worry that the Fed could have gone too far.
If approved, the plan could help to ease a housing crisis that has gripped the country.
Last year, a wave of underwater mortgages wiped out more than $1 trillion of underwater homeowners’ equity, according to a report from the Mortgage Bankers Association.
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