The financial-regulatory overhaul will result in some big changes in how Americans go about getting a mortgage. The goal is to make loans “safer” for those seeking them. As a result, fewer borrowers will qualify. This will also add to the cost of lenders making loans, which cost will likely be passed on to the consumer. Some of the main changes for mortgages to expect are:
1. Improved transparency of compensation for loan officers and mortgage brokers. They can’t be paid based on steering the borrower to a particular loan or rate.
2. Lenders will be required to retain at least 5% of the loans that are securitized. The idea here is that they will have some “skin in the game”.
3. Lenders will be required to take greater steps to document the borrowers ability to repay. So more paperwork to prove they can afford the mortgage payment. Self employed borrowers will have a more difficult time getting a loan.
4. New appraisal regulations – Now appraisal management companies will be established to facilitate the ordering of appraisals. These companies must be registered with state agencies.
The end result will likely be a smaller mortgage market that is much more cautious on making loans. The bill favors big banks over smaller lenders.
The government could be the biggest winner here as most loans entered into for the foreseeable future will be backed by the government.
This mortgage provisions of the bill are an important first step in an effort to make sure the foreclosure crisis we are experiencing does not repeat itself.
It should be further noted that the bill is silent on how to fix the broader mortgage market, including what to do with Fannie Mae and Freddie Mac. The administration is required to outline its plan in this regard according to the bill by early next year.