Mortgage Laws Enacted in New York

Gov. David A. Paterson recently created new legislation which is designed to protect both buyers and banks. The legislation is targeted at sub-prime loans which are defined as 1.75 percentage points above the prevailing market interest rates.

The legislation opens the possibility for buyers to avoid foreclosure actions if they can demonstrate that the loans should not have been given to them. Fannie Mae and Freddie Mac have stated that they will decline to purchase these sub-prime loans from New York given the increased exposure and cost as a result of this new legislation. Given the risks of this new law it is also possible that community banks and others that offer these sub-prime mortgages will decline to do so in the future. In addition to the risks involved with foreclosures, these banks may decline to offer sub-prime mortgages because Fannie Mae and Freddie Mac’s new policy will make it difficult for these lenders to re-sell these loans.

Federal Housing Administration (“FHA”) loans, which are insured and repaid by the government, could be the only remaining options for a buyer that cannot qualify for a loan that is not sub-prime. FHA loans are typically fixed rate loans but can become expensive because borrowers must pay FHA insurance premiums, which can add up to half a percentage point to the interest rate.

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