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 trying to take the teeth out of provisions that would protect consumers and limit the industry’s ability to discover loopholes in underwriting standards.
Mortgage rules to avoid an additional financial crisis
Proposed changes to mortgage lending rules include 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 these rules will affect how expensive mortgages will be and what types of mortgages can be offered by lenders. One of the key new rules mortgage industry lobbyists really would like 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 the lenders of mortgages try and behave?
With mortgage legislation that requires lenders to hold a stake, the idea is that they will probably end up acting a lot more professionally with their underwriting. When lenders sold their risk along with their loans, they were very careless and handed out numerous loans which were certainly going to 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 do not include interest-only payments, negative amortization or balloon payments. Exempt loans would also have to cap certain mortgage-origination fees at 3 percent of the loan.
Mortgages that are a lot more expensive with new rules?
Banks say new mortgage lending rules about risk retention are going to make mortgages more costly for consumers because banks can be required to hold more capital, a challenge for smaller lenders. But Housing Watch said that the 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 many paper trying to get loans in today’s constricted credit markets. More diligence from banks about totally verifying a borrower’s income to prevent default should be good for everyone.
Protecting borrowers from predators
New mortgage lending rules also consist of 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. The Wall Street Journal reports that brokers say 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. Barry Zigas, who’s director of housing policy for the Consumer Federation of The United States 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 are being fought consist of 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 demands them to prove that it is 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 find some way violate the new mortgage rules. According to Industry lobbyists this would make purchasing mortgages too risky for investors.
Additional details at these websites
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
