The Senate passed the financial regulation bill today, which will impact home buyers and lending guidelines. Chief among the changes impacting consumers is the creation a consumer bureau at the Federal Reserve and the requirement that lenders ensure a borrower is able to repay a home loan by verifying income, employment, and credit history.
- Under the financial regulation bill, at least two categories of mortgages likely will see a dramatic decrease in their availability: interest-only loans and stated-income loans. Both loan types likely would fall short of the government’s definition of “qualified” mortgages and therefore be avoided by many in the lending community.
- Many real estate analysts credit interest-only loans and stated-income loans as contributing factors to the decline of the housing market. With interest-only loans, borrowers pay none of the loan principal for a fixed period, typically 10 years, after which time they must make higher payments for the remaining 20 years of the loan. Unlike other loan products, stated-income loans do not require borrowers to verify their actual income. Only a few lenders continue to offer these loans, and typically only to borrowers with deep cash reserves and large down payments.
- The bill also severely limits the industry practice known as “yield spread premiums,” which in many cases incentivized mortgage brokers and loan officers to sell higher-interest loans to borrowers. The reform bill will no longer allow commissions earned by mortgage brokers and loan officers to be linked to the interest rate, but rather the loan amount. (a great change ) Once the bill takes effect, the total commission and additional fees charged by lenders and others in the mortgage process will be limited to a maximum of 3 percent of the loan amount, not including the real estate commission. My comments on this change is good. Some mortgage brokers received a greater commission by playing the consumer against the interest rate.
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