The Fed announced yesterday morning that it would tighten rules on lending to subprime and exotic loan borrowers. What does this mean for the real estate market?

Fed Chairman Ben Bernanke said, "Unfortunately, in the past few years, many mortgage loans were extended that were poorly underwritten or whose terms were inadequately disclosed, particularly in the subprime market. As you know, those poor lending practices have contributed to a sharp increase in mortgage delinquencies and foreclosures. The resulting costs have been felt not only by borrowers but also by entire communities, as foreclosure clusters have caused neighborhoods to deteriorate and reduced municipal tax bases. "

In response to these subprime issues, the Fed is prepared to put a heavy hand on subprime and exotic mortgages -- issuing new lending rules to restrict exotic mortgages and high-cost loans for those with weak credit. Hopefully these efforts, said Bernanke, will "help the financial system return to more normal functioning."

He continued that designing rules for this complex system is not an easy task -- but one which is worth the Fed drawing their attention to.

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Published: July 9, 2008

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