WASHINGTON -- Addressing a fundamental cause of bad home loans that are crippling the national housing market, the Department of Housing and Urban Development yesterday proposed a new standard to force lenders to explain clearly to borrowers, on a single page, the complicated terms of mortgages being offered.
"Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table, and that's been one of the factors driving the current housing downturn. Our proposal fixes that," HUD Secretary Alphonso R. Jackson said.
It's been three decades since the Real Estate Settlement Procedures Act has been updated. The complexity of today's closing process is widely believed to have allowed unscrupulous mortgage brokers and others who originated home loans to dupe homebuyers into complex loans with adjustable rates and unexpected balloon payments.
Under the proposed changes, which will be put out for public comment before final action, all loan originators would have to provide prospective homebuyers with a four-page good-faith estimate about the total costs involved in taking out a mortgage. This would serve as a check sheet to weigh against a final closing document.
On the front page of this proposed good-faith estimate, already tested by HUD on a sample of consumers, the precise interest rate is spelled out clearly. Also specified are whether that rate can adjust, whether the loan balance can adjust, whether there are prepayment penalties that discourage refinancing before a certain period, whether there are balloon payments, and whether there is an escrow account that collects and pays property taxes and home insurance.
As home prices surged nationwide from 2001 to 2006, lending standards weakened and loan originators - more often than not mortgage brokers - confused first-time and lower-income borrowers with stacks of paperwork and a complicated process.