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 more expensive for consumers because banks can be required to hold more capital, a challenge for smaller lenders. But Housing Watch said 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 verifying a borrower’s income to prevent default should be really good for everybody.
Being able to protect borrowers from predators
New mortgage lending rules also contain some compensation guidelines that prevent lenders from making more money by making riskier loans. This provision of the financial reform bill would make sure you will find lender-paid commissions depending on the rate or type of loan. According to the Wall Street Journal, 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. Barry Zigas, director of housing policy for the Consumer Federation of America 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.”
Mortgage lenders being saved from themselves
Other new mortgage rules that industry lobbyists are trying to fight consist of limiting the fees mortgage lenders charge if a borrower refinances the loan or pays it off early. They also like the rule that calls for 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 do not want borrowers to be able to sue them if they violate the new mortgage rules. Industry lobbyists think that this would make purchasing mortgages too risky for investors.
Read a lot more on this topic here
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
