Tuesday the US House and Senate plan to start refining mortgage legislation. The legislation would apply the biggest overhaul to mortgage lending rules in decades. The mortgage legislation is intended to end the risky lending practices blamed for causing the financial crisis. Mortgage industry lobbyists are working really hard to take the teeth out of provisions that would protect consumers and limit the industry’s ability to find loopholes in underwriting standards.
There are mortgage rules that prevent an additional financial crisis
Proposed changes to mortgage lending rules include 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 could be and what types of mortgages will be offered by lenders. One of the key new rules mortgage industry lobbyists want to undermine requires 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 mortgage lenders behave?
With mortgage legislation that requires that all lenders will hold a stake, the idea is that they will act more professionally with their underwriting. When lenders sold their risk along with their loans, they were very careless and handed out many loans which were destined for default. It was reported by the Wall Street Journal that 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 don’t include 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.
Mortgages that are more costly with new rules?
Banks say new mortgage lending rules about risk retention are going to make mortgages a lot more costly for consumers because banks can be required to hold a lot more capital, a challenge for smaller lenders. But Housing Watch explained that consumer groups support “encouraging the market” to sell safer products. New mortgage lending rules will make certain there is a lot more paperwork for borrowers, however they already push a lot of paper trying to get loans in today’s constricted credit markets. A lot more diligence from banks about verifying a borrower’s income to prevent default should be really good for every person.
Protecting borrowers from predators
New mortgage lending rules also 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. The Wall Street Journal reports that brokers say that the rule would make it harder for them to compete with banks, reduce competition and raise costs for consumers. All of the 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 United States, Barry Zigas, told the Journal 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.”
Saving from themselves mortgage lenders
Other new mortgage rules that industry lobbyists are trying to fight contain limiting the fees mortgage lenders charge if a borrower refinances the loan or pays it off early. They also don’t like the rule that needs them to prove that it is probably going to be in the borrower’s best interest to finance a loan, rather than just pushing a new loan to benefit from additional fees or commissions. Finally, mortgage lenders do not want borrowers to be able to sue them if they violate the new mortgage rules. According to Industry lobbyists this would make purchasing mortgages too risky for investors.
Citations
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
