Tuesday the US House and Senate plan to start refining mortgage legislation. The legislation would apply the largest overhaul to mortgage lending rules in decades. The mortgage legislation, which is really part of the financial reform bill, is intended to end the risky lending practices blamed for causing the financial crisis. Mortgage industry lobbyists are working overtime to take the teeth out of provisions that could protect consumers and limit the industry’s ability to find loopholes in underwriting standards.
Mortgage rules to prevent an additional financial crisis
Proposed changes to mortgage lending rules consist of a whole lot of new rules for loan repayment, the ability to sue your lender for fraud or poorly underwritten mortgages, revised appraisal rules and rules about how much risk lenders must share on the loans they sell to investors. Housing Watch reports that most of these rules will affect how expensive mortgages will end up being and what types of mortgages will be offered by lenders. One of the key new rules mortgage industry lobbyists really would like to undermine calls for lenders to hold a 5 percent stake in loans that are bundled and sold with other loans. Those bundles are the mortgage-backed securities that imploded financial disaster.
Will the lenders of mortgages try and behave?
With mortgage legislation that calls for lenders to hold a stake, the idea is that they’ll probably end up acting more professionally with their underwriting. When lenders sold their risk along with their loans, they were very careless and handed out many loans that were surely going to default. As outlined by the Wall Street Journal, mortgage industry lobbyists want to exempt mortgages from the 5 percent risk-retention requirement if the loans fully document a borrower’s income and assets and do not contain interest-only payments, negative amortization or balloon payments. Exempt loans would also have to cap certain mortgage-origination fees at around 3 percent of the loan.
New rules on more costly mortgages?
Banks say new mortgage lending rules about risk retention are likely to make mortgages more expensive for consumers because banks can be required to hold a lot more capital, a challenge for smaller lenders. But Housing Watch said the consumer groups support “encouraging the market” to sell safer products. New mortgage lending rules are going to make a lot more paperwork for borrowers, but they already push many paper trying to get loans in today’s constricted credit markets. A lot more diligence from banks about entirely verifying a borrower’s income to prevent default should be good for everyone.
Being able to protect borrowers from predators
New mortgage lending rules will consist of compensation guidelines that prevent lenders from making a lot more money by making riskier loans. This provision of the financial reform bill would bar lender-paid commissions based on the rate or type of loan. It was reported by the Wall Street Journal that brokers say that the rule would make it harder for them to compete with banks, reduce competition and raise costs for consumers. Consumer advocates say the changes will make it easier for borrowers to shop for loans and compare prices. Director of housing policy for the Consumer Federation of The US, Barry Zigas, told the Journal that the new provisions will shift the burden of proof “from the consumers having to protect themselves from unreasonable fees to the providers of services justifying their costs.”
Mortgage lenders being saved from themselves
Other new mortgage rules that industry lobbyists are trying to fight include limiting the fees mortgage lenders charge if a borrower refinances the loan or pays it off early. They also do not like the rule that requires them to prove that it is in the borrower’s best interest to finance a loan, instead of just pushing a new loan to benefit from additional fees or commissions. Finally, mortgage lenders don’t want borrowers to be able to sue them if they violate the new mortgage rules. Industry lobbyists say this would make buying mortgages too risky for investors.
Find a lot more information on this topic
Housing Watch
housingwatch.com/2010/06/21/new-mortgage-rules-may-hurt-borrowers/
Wall Street Journal
online.wsj.com/article/SB10001424052748704050804575318753964100106.html?mod=googlenews_wsj
