BIG NEWS - Per Banking Committee Website - Dodd Added the information today to "upgrade" FHA into his bill. The wording for the Bill is still not posted in entire form on Thomas - keep checking back. Raises FHA limit to FNMA; lowers downpayment and calls for BONDS not AUDIT to be approved FHA limit - if they left the wording from the House version....
According to the Legislation that Senator Dodd (also running for President) placed into Congress with his BILL 2452 - no cost refinances just WENT AWAY.
A full copy of the bill still does not show up on Thomas - but if you hit this link today -and put in the bill number; you should get the full text.
According to The Senate Banking Committee Website no cost refinances just came off the table. This is perhaps the WORST of all provisions - although I'm certain that once the full bill is available for view - more issues will be found. Here in North Carolina we are already working with YSP and rate cost caps. This is obviously the Senate version of the Miller/Watt/Franks Bill already passed in the House (HR 3915). The next step will be for the House and Senate to agree on the details - and then it's done. 2008 will see the first National Predatory Borrowing, er, Lending Bill in place.
SENATE BILL 2452
The following key protections are triggered for high cost mortgages:
- • No financing of points and fees. The bill prohibits a creditor from directly or indirectly financing any portion of the points, fees or prepayment penalties. These limitations and prohibitions are designed to discourage lenders from "flipping" the mortgage in order to extract additional excessive fees.
- • Prohibition on prepayment penalties. The bill prohibits the lender from imposing prepayment penalties for high cost loans.
- • Prohibition of Yield Spread Premiums (YSPs). The bill prohibits YSPs for placing a borrower in a high cost loan that is more costly than that for which the borrower qualifies. Mortgage brokers, who have originated about 70 percent of subprime mortgages, receive higher compensation through YSPs for steering borrowers to these higher cost loans. This bill will eliminate the incentive to "upsell" these borrowers.
- • Net Tangible Benefit. The originator must determine that a high-cost refinance loan provides a net tangible benefit to the borrower.
- • Prohibition on balloon payments. The bill prohibits the use of balloon payments.
- • Limitation on single premium credit insurance. The bill would prohibit the upfront payment or financing of credit life, credit disability or credit unemployment insurance on a single premium basis. However, borrowers are free to purchase such insurance with the regular mortgage payment on a periodic basis, provided that it is a separate transaction that can be canceled at any time.
In addition to other changes that many of us expected - I was shocked and surprised to find that there would actually be a LAW about what your debt to income Ratio can be!
(Direct Quote here) Requirements for making subprime or nontraditional mortgages:
- • Ability to repay.A mortgage originator must establish that a borrower has the ability to repay the loan based on the fully-indexed rate, assuming full amortization. In making this determination, the originator must consider the borrower's income, credit history, debt-to-income (DTI) ratio, employment status, residual income, and other financial resources.
- • Require Escrows for Taxes and Insurance.While nearly all prime mortgages include escrows for taxes and insurance, very few subprime loans include such escrows. The legislation would require these escrows for all subprime and nontraditional loans.
Nearly all prime loans include escrows for taxes and insurance. Yet, few subprime mortgages include these escrows. Currently, unscrupulous mortgage originators entice unsophisticated borrowers into taking out abusive loans with promises of lower monthly payments, in part by comparing their current payments, which often include escrows, with proposed loans that do not include escrows in the monthly payments and, therefore, appear lower. Then, when insurance or tax payments are due, the borrowers, who often do not have the resources to pay the taxes, are forced to seek new loans to cover the required payments, generating a whole new set of fees. Lack of escrows, in other words, becomes a tool for "flipping" borrowers into yet another, high-cost loan.
- • Debt-to-Income Ratio. If a borrower's DTI ratio is greater than 45 percent, a mortgage is assumed to be unaffordable unless the originator can show, at a minimum, sufficient residual income to afford the loan.
The ability to repay standard is largely based on guidance published by the federal regulators in late 2006 and early 2007 and applied to the subprime and nontraditional mortgage markets.
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The following protections apply to borrowers who take out subprime or nontraditional mortgages:
- • No Prepayment Penalties. The legislation will prohibit all prepayment penalties for subprime and nontraditional loans.
Prepayment penalties unfairly trap subprime borrowers in expensive subprime mortgages. These penalties make it cost-prohibitive to refinance into better loans, or strip out equity when the penalty is paid. Studies done by the Center for Responsible Lending (CRL) show that interest rates on subprime loans are no lower for loans with prepayment penalties - the ostensible rationale for these fees - than for loans without these penalties, even after holding credit scores, LTVs, and other factors constant. Moreover, the CRL study shows that the odds of having a loan with a prepayment penalty increases significantly for borrowers who live in minority neighborhoods.
- • No Yield-Spread Premiums (YSPs). The legislation will prohibit YSPs for subprime and nontraditional loans.
YSPs are payments made by lenders to mortgage brokers, usually without the borrower's knowledge. In exchange for the YSP, the lender charges the borrower a higher interest rate than that for which he could have qualified. The industry justifies YSPs as a way for the borrower to pay the broker's fee and other closing costs without paying cash at the closing table. However, numerous studies have shown that YSPs result in higher costs for consumers. For example, a study done by HUD (while Senator Martinez was Secretary) concluded that half ($7.5 billion) of the $15 billion paid in YSPs at the time of this study "is not passed through ... to reduce closing costs." More recent research by HUD indicates that fees tend to rise even as interest rates do - exactly the opposite of what the industry says should happen - and that this effect is more pronounced for minority borrowers. Research sponsored by Freddie Mac also came to the conclusion that borrowers who pay YSPs along with direct fees pay more for loans, all other things being equal.
- • Net Tangible Benefit. The originator must determine that a high-cost refinance loan provides a net tangible benefit to the borrower.
Yeah - that's right - you are suppose to do subprime loans with no YSP and a cap of 5%. Again, we're pretty much doing that in NC - the sad thing for the consumer IMHO is the elimination of no cost refis.
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Eleanor,
Posts like this are why I'm a subscriber to your blog! Thanks for the heads up. And I didn't know that you had YSP caps in NC. I'll park to read the comments of the rest of your readers.
Mike in Tucson