New Mortgage Rules: Battle Looms in Congress

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This week starts a showdown on mortgage-lending rules. How strong the protections will be for consumers will depend upon how successful lenders are at softening the rules proposed by Congress. Up for grabs are rules for: loan repayment; appraisals; how much skin lenders must have in the game; and suing a lender for fraud or poorly underwritten mortgages.

Most of these rules ultimately will affect the cost of mortgages and the types of mortgages pushed by lenders. One of the key rules that mortgage lenders want to soften is the rule requiring 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 and caused the financial disaster.

By requiring lenders to hold a stake, Congress believes that they will be more cautious about their underwriting. When lenders had no skin in the game they were very careless with their underwriting, allowing "liar loans" and other exotic types of mortgages that are now the most likely to default.
Some lenders worry that these stricter rules will make mortgages more expensive for consumers, especially loans with terms other than 30-year conforming fixed-rate mortgages. But consumer groups support "encouraging the market" to choose to sell those safer products, according to Barry Zigas, director of housing and credit policy for the Consumer Federation of America. He thinks these rules are "very important and reasonable" to prevent a repeat of the "economic disaster" we all just experienced. Sounds like the right way to go. Hopefully lenders will not be able to soften these rules during the process of reconciling the bills between the House and Senate this week.

Under these new rules you will need to push more paper to get a mortgage, but it probably won't be much different than what we are seeing in today's very cautious mortgage market. Banks may become even more diligent about collecting the documents that prove your income. Self-employed people without two years of provable business income likely will find it nearly impossible to get a mortgage under the new rules.

Another major rule lenders would like to change involves how lenders are compensated. Under the new rules, lenders no longer can pay commissions based on the rate or type of loan you choose. This form of compensation encouraged mortgage brokers to steer people into higher interest loans or more risky loans for which brokers received better compensation. This change is critical to protect all consumers. It would be a travesty if lenders kill this new provision this week.

The good news with the new law: The burden of proof would shift from the consumer to the provider of mortgage services, to prove that the fees they charge are justified. Under the old law, the consumer had to prove that the fees were not justified. This change will make it much easier for consumers to shop and compare mortgage loans.

Mortgage lenders will be limited in their ability to charge fees if you refinance or pay off your loan early. Also, lenders would have to prove that it was in your best interest to refinance. They won't be able to push you into a new loan just because they will benefit from new fees or get a great commission.

Another key provision that lenders hope to kill is the ability to sue your lender under certain circumstances. Right now, lenders want to delete or revise language that will allow borrowers to to sue lenders for violations of underwriting standards. The law as now written will allow you to sue your lender or mortgage investor if you can prove the loan was written fraudulently or poorly underwritten. Some in the industry say this will make mortgage investing too risky.

One other key issue up for grabs is the rules on appraisals. Real estate agents and brokers want changes in the current rules on ordering appraisals. These new rules were established after the mortgage market collapsed because there was so much evidence of game-playing in the appraisal marketplace. But real estate professionals say the rules have gone too far, and too often an appraiser is assigned who does not understand the local real estate market.

In this case, I hope something is done to correct this problem. I live in one of those types of developments where the homes inside the development are upscale and very different from the surrounding neighborhoods. Many home sales have fallen apart because appraisals came in well below true market value when they were done by appraisers who were based hundreds of miles away from my community and didn't understand neighborhood differences. Some tweaking is definitely needed to improve the current appraisal mess.

Lita Epstein has written 25 books, including "The 250 Questions Everyone Should Ask About Buying Foreclosures" and "The Complete Idiot's Guide to Personal Bankruptcy."



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