Homebuyer Safeguards? By Golly, I Think They Got It - Included deep within the massive financial reform package that a House-Senate panel approved on 6/25/10, are some consumer protections that will change the way people shop for a mortgage. I wondered just how far the government would go to prevent a re-occurence of the mortgage meltdown once the market returned to normal. And, by golly, they did what I thought they wouldnt. The reforms are:
- Documentation Required: We all know that a big part of the mortgage mess was due to the Stated, No Income, and Reduced documentation loans which allowed a homebuyer to provide little or no documentation concerning their current employment. Well, the goverment will now force lenders to incorporate methods designed to find out how much money a person actually makes. The government does not actually prohibit a lender from making a No-Doc loan but they will be subjected to certain risk-retention regulations, otherwise known as "having skin in the game. In essence, if a lender chooses to make loans on this risky criteria in the future, they will be subject to severe repercussions.
- Prepayment Penalties: Another major issue that added to the mortgage meltdown were lender's prepayment penalties. For example, a homeowner hoping to refinance out of an adjustable rate mortgage before the rate went higher, was often met with exuberant prepayment fees from the lender that increased their balance and sometimes made refinancing impossible. Under the bill, prepayment penalties can only be incorporated into the most basic, straightforward mortgages.
- Yield Spread Premiums: Yield Spread Premiums or YSP was another major factor that added to the mortgage businss since brokers and loan officers were generally compensated the best by promoting the riskier type of mortgages. A “yield spread premium” (YSP) is the money or rebate paid to a mortgage broker for giving a borrower a higher interest rate on a loan in exchange for lower up front costs, generally paid in Origination Fees, Broker Fees or Discount Points. So, for example, a mortgage broker was paid a 5% YSP for offering a PAY OPTION ARM MORTGAGE to a homebuyer compared to a .5%-1% YSP for a 30 Year Fixed. This new legislation would restrict excessive YSP. THIS IS HUGE!
- Appraisal Standards: New appraisal standars will be created to ensure that no "pressure" can be placed on the appraiser to have the value of a property "come in" at the desired value of the lender. The suspicion was that banks would hire the appraisers that would consistently come back with values higher than others. One rule already implemented is that mortgage brokers/loan officers can no longer order the appraisal themselves or be involved in the appraisal process.
These new regulations coupled with the strict licensing and educational requirements for all mortgage professionals will MOST CERTAINLY change the lending environment for the better. No more unlicensed loan officers, 3 year prepayment penalties, stated income loans, 560 credit scores, and inflated appraisals. PINCH ME because I think I'm still dreaming! This will most certainly be shape up to be a new and intense lending environment that has not existed for decades. Put on your seatbelt because we are all in for a bumpy ride.