New Mortgage Rules

Most of us have little  trouble shopping for a car. When we compare mileage, horse power and options like power steering and transmissions, we get it. In fact teenage boys can fill a day talking about autos. In contrast, I bet that among people who discuss mortgage terms for any length of time in a social situation, one of the talkers probably works in real estate. For many, the fiscal details of a mortgage have been largely opaque. That changed January 1st.

If you are looking buy a home or trying to lower your mortgage payment by refinancing, you can thank the US Department of Housing and Urban Development, HUD, for a change in its Real Estate Settlement Procedures Act, RESPA rules.  As of now, HUD requires that mortgage originators give supply prospective borrowers with a standardized Good Faith Estimate, GFE,   in clear readily grasped language, that discloses key loan terms and closing costs. The charges are broken down into two categories. Some cannot exceed the estimate, including lender inspection, points, credit, and application fees, appraisal, administrative, wire, and document preparation fees. Other charges can grow by 10% compared to the estimate. These fees include attorneys’ charges, and title insurance and recording fees from providers offered by the mortgage orginator for these services. If allowed by the lender, borrowers can use their own providers that are not subject to the good faith estimate requirement. Lenders are required to give consumers the GFE within three days of receipt of a loan application. Closing agents must provide borrowers with a new HUD-1 settlement statement   that transparently compares consumers’ final and estimated costs.

These disclosures will enable consumers to more intelligently compare mortgages. The effect is expected to be similar to the implementation of cost per ounce labeling on supermarket shelves a few years ago. Pay particular attention to the interest rate and the adjusted origination charge, which includes any points paid up front to lower the interest rate. Title insurance is usually a substantial charge. It is frequently overpriced and the new forms let borrowers know that they don’t have to hire the insurer the lender recommends.

Another pending change that will soon be implemented by the Federal Reserve Bank under the Truth in Lending Act will be prohibiting mortgage originators from steering borrowers to higher cost loans as a way to increase the loan agent’s commission. This change results from a study that showed that many who defaulted on high cost sub prime loans did in fact qualify for mortgages that they could have more readily handled.

Earlier this week, in a speech before the American Economic Association, Federal Reserve Chairman Ben S. Bernanke blamed much of the housing bubble on borrowers taking on mortgages that they could never pay off as written. “At some point, both lenders and borrowers became convinced that house prices would only go up,” Bernanke said. “Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages. For a time, rising house prices became a self-fulfilling prophecy, but ultimately, further appreciation could not be sustained, and house prices collapsed.”

Since home equity will take long time to rebound, and we can no longer bank on zooming home values to bail us out of excessive spending, the new rule changes are vital for homeowners to determine a clear eyed assessment of their obligations.

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