The sweeping regulatory changes from the Dodd-Frank Wall Street Reform and Consumer Protection Act have kept the mortgage lending industry on its heels for the past few years. While there are plenty of good intentions and a handful of potentially positive reforms, it seems that the Act is becoming a never-ending piecemeal plan to bolt on new rules and regulations as opposed to a one-time, clean overhaul of the mortgage lending system.
A vast array of changes in disclosure and compensation have already been levied upon the industry in recent years to make mortgage paperwork easier for a consumer to understand. Most agree that there hasn't been a significant increase in the "readability" of mortgage documents, based on consumers' responses as to whether or not they understand everything they have signed at a closing or refinance.
The latest proposal attempting to "level the playing field" is to:
- Require lenders to make an option available for a No-Point, No-Fee loan
- Require a reduction in interest rate when consumers elect to pay upfront points or fees
The intent is to allow consumers to compare mortgages apples-to-apples without confusing differences in fees and rates. As an example, a borrower could see these two options from two lenders:
Lender A Option 1: 4.0% interest with 1 point and $3000 in fees
Lender A Option 2: 4.25% interest with 1 point and $500 in fees
Lender B Option 1: 4.125% interest with 0.5 points and $2100 in fees
Lender B Option 2: 4.5% interest with no points and $0 in fees
In this case, the consumer doesn't have an even comparison across the board. The loans all seem similarly priced, but without a comparison at the exact same fees, or the exact same rate, it's hard to tell which might be better for an individual borrower. They need to be compared at the same rate, or the same fees.
This all sounds like a good plan for consumers. Herein lies the problem: This is already standard industry practice.
I could call any lender in the country and ask them to do exactly this: "Offer me a no-point, no-fee loan option, and one where I pay full fees upfront for a reduced rate." The lender will be happy to oblige. There is no need for a federal government regulation to do so. This is merely a lender offering me two loans, both of which create the same profit margin for their company. I can pay no points for a higher rate, or 1 point, even 3 points to reduce my rate. The lender makes the same profit based on increasing or decreasing the interest rate. They don't care which option I choose.
Lenders haven't opposed to offering these options. The government's concern may be that many consumers are not aware that they have these options, but this is not some "great deal" that lenders are hiding and only friends of the bank can receive (as opposed to the sweetheart mortgage deal that Chris Dodd, one of the bill's sponsors, received).
Mortgage lending's restrictions in recent years are one of the top three concerns for the health of real estate markets moving forward. While common sense reforms like verifying income and employment have come back to the private market already, micromanaging processes like these from the federal level will only stymie the industry further. Looking for greater consumer awareness of mortgage options is certainly a worthwhile goal, but creating a federal requirement for something that already exists is like passing a law that water shall only run downhill. Sometimes politicians push paper just to look busy.
Consumers: Go ask your lender for these options the next time you refinance or buy a home. It costs you nothing extra, and will give you a much clearer way to compare your options--no government intervention necessary.
© Seattle Homes, LLC: - Sam DeBord, Managing Broker, Realtor
Coldwell Banker Seattle: Coldwell Banker Danforth & Associates
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Data Source: NWMLS - The Northwest Multiple Listing Service did not compile or publish this information.
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