When Congress passed new legislation in May 2009, consumer protectionism took on new meaning in the area of mortgage reform. The new bill put overdue pressure on lenders to raise levels of integrity and accountability in the shaken mortgage industry. While the law may limit the number of new loans, the consumer is better served with a return to credible first and second mortgage standards.
As a result of the legislation, the lender must now provide a more transparent lending process and must document all financial qualifications of prospective borrowers. The mortgage application process is more cumbersome, but certainly serves to the consumer’s benefit.
The act takes a strong position in opposition to the unfair lending practices of the past. For example, the bill prohibits the lender from directing consumers to more costly, fee-based loans, for which the mortgage broker stands to reap quick profits. In efforts to raise accountability standards, consumers are now permitted under federal law to directly redress firms involved in securitizing mortgages unless the securitizer has provided the borrower with a loan that meets the basic ability to repay standards.
The bill sets new standards that define the net tangible benefits to the borrower. Any loan that does not comply with these standards is in violation of federal law and the issuer is liable for damages. This is welcome news to consumers who had been shaken by reports of loan improprieties.
Today’s mortgage market is very different than the market that created the wheeling and dealing atmosphere of 2006 and 2007. In fact, the Mortgage Reform Act encourages responsible underwriting through federal mandates that require creditors to retain an economic interest in a material portion of at least 5 percent of the credit risk of each loan. This means that when the creditor sells, transfers or conveys the loan to a third party, the originator must retain a 5 percent interest.
This retained exposure keeps the lender “in the game” so to speak. Now, there is lasting incentive for the lender to create good, credit worthy loans. Federal banking agencies are empowered to make exceptions to this risk retention clause if form and amount are deemed advantageous to the borrower.
As the U.S. works its way through the housing crisis, new mortgages and new refinancing plans, including modifications, will now serve the borrower better. Combines with new appraisal standards, qualified borrowers are assured of obtaining fair loans that are not inflated on properties that have fair market value. These core issues are assured by the new federal standards.
The housing crisis is filled with tragic stories of foreclosure, short sales and plunging values affected by these conditions. With these new lending policies in place, the market should stabilize and viable loans will be available to take advantages of the depressed residential market.
The implications of these new standards have inspired the recent market turnaround as buyers enter and return to the home-buying process. Congress and the mortgage industry are to be commended for their efforts to stabilize the lending industry.