By NICK TIMIRAOS JUNE 21, 2010 NYTimes
As Congress moves to finalize new financial regulations, the mortgage industry is working to soften a series of provisions that reshape how most Americans obtain home loans.
The provisions in the legislation seek to eliminate questionable practices that proliferated during the housing boom by outlining clear underwriting standards, holding lenders more responsible for loans, and changing the way loan originators are paid. In addition, consumers would get new rights to seek damages when the mortgage process goes awry.
New Rules Take Shape
Requirements in proposed legislation:
- Lenders required to hold 5% of the loans they originate that are sold to investors as securities
- Borrowers get greater protections when the mortgage process goes awry
- Fees must be charged upfront or reflected in the mortgage interest rate, but not both
Changes wanted by mortgage industry:
- Exception for “qualified mortgages” that meet certain underwriting standards
- Lenders get greater protection from lawsuits if they satisfy tougher loan standards
- Ability to charge fees upfront and to embed them in the mortgage interest rate
Industry officials are trying to limit their liability on new consumer-friendly provisions while pushing for greater flexibility on rules that aim to improve underwriting standards by forcing the original mortgage lender to keep a stake in the loan.
A panel of lawmakers reconciling the differences between the House and Senate bills is set to take up the mortgage provisions on Tuesday.
Both bills would require lenders to retain a 5% stake in loans that are bundled with others and sold in pieces to investors. The idea is that if lenders hold on to a stake, they are more likely to make sound loans.
Lenders want to secure a provision, included in the Senate bill, to exempt mortgages that meet certain underwriting standards from the risk-retention requirement that they keep 5% of loans they sell off. Such loans would have to fully document a borrower’s income and assets and couldn’t include features such as interest-only payments, negative amortization or balloon payments. Loans would also have to cap certain mortgage-origination fees at 3% of the loan.
Risk-retention rules are likely to raise the costs of making loans because banks will be required to hold more capital, a particular challenge for smaller lenders.
While consumer groups generally support exceptions for certain loans perceived as safer, some analysts say the provision would effectively promote certain loan types over others.
“One thing that disappoints me is that it revives the fetish of the traditional, fixed-rate, 30-year loans … without examining any of the risks of those loans,” such as higher interest-rate costs, said Todd Zywicki, a professor of law at George Mason University in Fairfax, Va.
Already, both bills would limit the ability of mortgage lenders to charge borrowers fees if they refinance or pay off their loans early.
The proposed legislation would also require lenders to ensure that borrowers can repay their loans and to prove that any refinancing provides a “net tangible benefit” to the borrower.
The industry wants to limit lenders’ legal liability when they make loans that meet the new standards. “If you comply with the provisions in the law…the borrower shouldn’t be able to challenge you later on,” said Glen Corso, managing director of the Community Mortgage Banking Project, which represents independent nonbank mortgage lenders.
Consumer groups oppose efforts to weaken the ability of borrowers to take legal action if they believe lenders have run afoul of the new rules.
Lenders also want to limit the amount of time that borrowers can dispute a foreclosure if they later find that their loan didn’t satisfy the new standards. Right now, the bill doesn’t include a statute of limitations on those claims. Consumer groups say time limits shouldn’t be added because some loans could contain features that don’t take effect for several years. But lenders say that a loan that defaults long after its origination isn’t likely to fail because of underwriting defects.
All together, the measures should lead banks to become more diligent about documenting a borrower’s income and assets. While that will curtail the abuse of “liar’s loans” that saw many borrowers and brokers report false incomes on loan applications during the past decade, the tougher standards could make it harder or more expensive for self-employed borrowers to get a loan.
Another key provision in the bill would change the compensation model for loan originators and mortgage brokers to prevent them from steering borrowers into loans with a higher rate. The bill would bar lender-paid commissions based on the rate or type of loan; origination costs would have to be paid upfront or over the life of the loan in a higher rate, but not a mix of both.
Brokers say that the rule would make it harder for them to compete with banks and that it would reduce competition, raising costs for consumers. “Most mortgage brokers will have to charge their fees upfront, which means the competitive landscape just shifted to banks and lenders,” said Roy DeLoach, chief executive of the National Association of Mortgage Brokers.
Consumer advocates say the changes will make it easier for borrowers to shop for loans and compare prices.
The new provisions will shift the burden of proof “from the consumers having to protect themselves from unreasonable fees to the providers of services justifying their costs,” said Barry Zigas, director of housing policy for the Consumer Federation of America.
“The whole market should be much safer now,” said Julia Gordon, senior policy counsel at the Center for Responsible Lending.
Meanwhile, brokers and real-estate-industry lobbyists want to relax new home-valuation rules imposed last year to ensure appraiser independence. Those rules bar mortgage brokers and loan officers from selecting appraisals by requiring the use of third-party appraisal management firms. Many banks, which own or have stakes in those firms, oppose the effort to alter the rules, as do consumer groups that say any attempt to weaken them could lead to appraisal fraud.
But brokers and real-estate agents say the rules have produced unrealistic appraisals from individuals who aren’t familiar with specific neighborhoods. Brokers say a new system should be created that allows them to order appraisals without being able to select the actual appraiser, and that consumers should be free to use an appraisal ordered by one lender even if they decide to get a loan from a different lender.
Write to Nick Timiraos at firstname.lastname@example.org© 2010-17 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.