How financial reform will change mortgage shopping

Posted by  on Dec 13, 2010

Proposed consumer protections could change the way mortgage products are offered and sold. If Congress approves the proposed legislation in its current form, no-documentation loans will be reduced, mortgage fees will be limited, a new consumer protection agency will be established, and new standards for home appraisals will be created.

Best mortgage rates: income and assets must be documented

While today's tighter mortgage guidelines prohibit no-doc loans that don't require verification of the borrower's income or assets, these loans are likely to come back when the lending climate loosens up. The new law would discourage that from happening. The bill doesn't ban no-doc mortgages outright, but if lenders choose to make one they will be on the hook if the loan fails.

Fees, penalties will be limited

The legislation also limits mortgage loan prepayment penalties - the kinds of mortgages they can be attached to and how high they can be. The legislation would also restrict excessive yield-spread premiums (YSPs), one form of broker compensation. YSPs are paid to brokers by wholesale lenders - the less favorable the terms of the mortgage, the higher the YSP paid to the broker.

New consumer financial protection agency

The new Consumer Financial Protection Bureau (CFPB) will be granted far-ranging power to achieve its aim of protecting consumers who buy loans and other financial products. Another important task of the bureau is consolidating the reporting and disclosure oversight required by laws such as the Real Estate Settlement Procedures Act, Truth in Lending Act and Home Mortgage Disclosure Act. This will likely result in a new and different set of disclosures for consumers, which will hopefully make it easier to compare mortgage rates.

New standards for mortgage appraisals

The Home Valuation Code of Conduct (HVCC) was created to make appraisers independent of anyone who stands to gain financially from a home refinance or purchase. However, HVCC has been shown to be bad for appraisers (the management companies that provide a buffer between them and the Realtor and lender also take up to 40 percent of their pay), and borrowers (appraisal management companies or AMCs often use inexperienced or non-local appraisers, resulting in poor-quality work).


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