Monday, July 19, 2010

Finance Reform - How Will It Affect Mortgages and Real Estate?

Now that the Wall Street Reform and Consumer Protection Act (the new finance reform law) has been passed by Congress, we’re getting many questions about how this new law is going to affect the lending and real estate industries.

The specifics of the new law will only be known when the new Bureau of Consumer Financial Protection is formed and hammers out the details. However, here are a few things that are known:

-- Unless a loan is a “qualified mortgage”, meaning it is low risk: full doc (income and assets verified), fully amortized (no interest-only payments), no balloon payment, no negative amortization (option ARMs), etc., the lender will need to cover 5% of the risk. That means the lender will be on the hook for 5% of the loan if the borrower goes into foreclosure. Not many sane lenders are going to want to write checks that big, so kiss stated doc, interest-only, and risky loans good-bye – unless the interest rates are a lot higher than they are for a low-risk “qualified mortgage”.

-- Income for mortgage loan originators (loan officers) will be restricted, but only for mortgage brokers, not mortgage bankers. The difference between a broker and a banker is that a broker only arranges for the financing, but does not fund the loan themselves. The money that is sent to the closing comes directly from the lender. A banker, on the other hand, funds their own loans. No one except the loan officer and the title company typically knows how the loan is funded, so don’t expect much of a change here. Any broker can very easily become a banker. It just takes a few hours to sign up with a different company. Wholesale bankers can still represent more than one lender, just as they do now, so everyone will NOT end up working for one of the big banks.

-- Loan disclosures (including the Good Faith Estimate) will change once again. Not much of an impact here because no one reads anything anyway.

The bottom line is that loans will continue to get harder to qualify for because sub-prime is dead and not coming back until the economy is fixed. That will take years and years. To get a loan, people will need good credit, steady income, and some money for a down payment.

The new law makes it official – things have changed.

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