Although the Wall Street and banking features of the giant financial industry reform bill taking shape on Capitol Hill have drawn most of the attention, home buyers and mortgage applicants should be major winners when the legislation is finally signed into law, probably early next month.
Not only will the zero-down, funny-money loans and slipshod underwriting that triggered the housing bubble and bust be virtually eliminated from the marketplace, so will the steering practices used by loan officers to earn extra fees by putting unsuspecting borrowers into toxic mortgages.
Conferees from the House and Senate are negotiating the differences between their bills, but on the key consumer fundamentals, it's not too early to project the probable results.
Here's a quick overview of what's likely to go President Obama's desk that affects housing and mortgage finance:
— Some form of new consumer-protection agency — armed with broad powers to rein in bad mortgage products and predatory lending practices anywhere in the country — is a certainty. The House bill creates a stand-alone independent federal entity, while the Senate bill creates a consumer financial product safety "bureau" housed inside the Federal Reserve. Rep. Barney Frank (D-Mass.), the House Financial Services Committee chairman, says he expects the conference to approve his stand-alone concept. But either way — House or Senate version — consumers will for the first time have regulators and investigators watching out for the latest scams and gimmicks in the home loan industry.
— Uniform minimum standards for mortgages and underwriting practices. Although such bubble-era options as "stated income," "pick-a-pay" and negative-amortization loans are not prohibited by the legislation, lenders will be powerfully motivated to offer fully documented, verified-income mortgages with down payments sufficient to ensure that borrowers have a stake in the deal. There will also be mandatory determinations by lenders that applicants can afford to repay the mortgage debt, insurance and taxes on time.
— Prohibition of prepayment penalties on nontraditional loans that are not fully documented, fixed rate and carry standard amortization schedules. This would prevent, for example, the sort of "gotcha" adjustable-rate mortgages of the boom years, where consumers found themselves trapped into fast-rising payments and heavy penalties if they tried to refinance early. Prepayment penalties would still be permitted on income-verified standard loans, but lenders would be required to offer alternative financing without penalties for early payoffs.
— Mandatory provision of credit scores when mortgage applicants are turned down. Although this appears only in the Senate version, it has a strong chance of ending up in the final bill in some form, given the pro-consumer composition of the majority of the House negotiating team in the conference. Since lenders often place great weight on credit scores in their decisions, the idea here is to provide unsuccessful applicants with the score that contributed to the loan turndown. Along with the score, lenders also would be required to provide the name and contact information of the score provider — typically a credit reporting agency — plus brief descriptions of the negative information in their files that led to the low score. Consumers already have the right under federal law to free credit reports when they are rejected for a loan, but they don't get free credit scores.
— Restrictions on mandatory arbitration clauses embedded in many contracts for mortgages and other credit. Both the House and Senate bills contain provisions on this. The House bill empowers the Consumer Financial Protection Agency to restrict lenders' use of mandatory arbitration requirements if it finds them to be harmful to borrowers. The Senate version requires the consumer agency to conduct a study of mandatory arbitration clauses before taking any action to restrict them. Either way, there could be important changes in industry practices.
— Real estate appraisal improvements. The House bill gives the new consumer protection agency oversight on home mortgage appraisals, and the power to create rules and standards to guarantee "appraiser independence" from pressures by lenders, realty agents and others. It also requires that once the new rules are adopted, the controversial "Home Valuation Code of Conduct" mandated last year by Fannie Mae and Freddie Mac be terminated. The code has been criticized by consumers, realty agents, builders and appraisers for encouraging lowball appraisals and the use of inexperienced appraisers willing to work for low fees. The Senate bill does not have appraisal provisions, but a bipartisan push is underway to persuade conferees to adopt the House version.
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