Question: How do you guarantee borrowers will not default on their loans?
Answer: Don’t loan them money! Is this where we’re going?
It seems that government regulators have decided that the activities of real estate practitioners have contributed to the economic downturn. Many changes to the industry can be expected as a result. As the proverbial pendulum swings away from too little government oversight to more regulation, one can expect it to swing too far into regulation, with consequences unforeseen. The bulk of regulation will be directed to lenders, making sure this country never sees loan defaults on this scale again. Regulations in the year 2009 include:
HVCC – This rule dictates there’s no contact between the lender (and Realtor) and the appraiser on conventional loans, so no influence on value is possible. This rule had many detrimental effects on the market, and it may be revoked soon.
MDIA – This stops the lender from charging any fee (except credit report) until 3 days have passed from application date. This is to allow the borrower to be a better shopper for loans, without being committed right away because of fees charged. It also delays the transaction (up to 7 business days, for lender to re-disclose) if the final interest rate/terms are higher than previously disclosed. (please read my blogs on these subjects)
2010 – This is just the start of changes to the loan industry, because many more changes are coming!
More extensive loan disclosures in plain language! – On January first, the federal government is mandating that everyone be using the new consumer-friendly Good Faith Estimate mortgage disclosures and the new HUD-1 settlement statements. This makes the lender guarantee many of the loan terms, and forces the lender to pay additional fees that may arise.
Mortgage Brokers – The manner in which Mortgage Brokers are paid, may be drastically revamped in a way that changes the whole industry (some say it may destroy mortgage brokerage industry). Brokers will no longer be getting commissions, based on rates and terms, and instead will get a flat fee for delivering a loan package. If it is implemented, brokers will have to rebuild their industry, almost from scratch. Direct lenders will be the primary beneficiary from this, as they will no longer have competition for borrowers from mortgage brokers.
FHA loans – there are plans for the appraiser to be disconnected from the lender similar to the failed HVCC program. This may be implemented for FHA loans, while it is being discontinued for conventional loans — go figure.
Minimum down for FHA loans may be changed from 3.5% down to 5% and the up-front MI may be increased. The increased MI (mortgage insurance protects the lender) may be needed as the reserve fund has fallen below legal limits.
This is by no means a complete list of coming changes, but just some of the highlights.
As regulators impose new restrictions and rules, fewer borrowers will qualify for loans. Consider how many people will be excluded from buying a home because of: forclosures (5 years), job losses, additional regulations, and more. It seems that the recovery will be hindered by this loss of potential buyers and it is conceivable that homeownership will be the privilege of just a minority of Americans in coming years.
