Few borrowers read every line of the avalanche of paperwork that comes with a mortgage, and even the most well-intentioned consumer might have difficulty understanding all costs associated with their loan -- and how it compares with what other lenders are offering.
Now, well-intentioned lawmakers are looking to make the mortgage process easier to understand and fairer overall, through regulations that could come to fruition via the proposed Consumer Financial Protection Agency.
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If the reforms materialize, "the days of fine print, amorphous language and an avalanche of papers . . . will come to an end," said John Taylor, president and CEO of the National Community Reinvestment Coalition, an association of community-based institutions that promotes access to banking services to create affordable housing and job development. "Transparency is the name of the game."
The goals of the reforms:
- Requiring transparency. Consumers would receive a simple, integrated federal mortgage disclosure that is "reasonable, clearly written and concise," and be adequately presented with the risks and benefits of a mortgage product.
- Promoting simplicity. Borrowers would first be offered "plain vanilla" mortgages with terms that are straightforward. They can obtain more complex mortgages, but those vanilla loans will be presented as a first choice.
- Demanding fairness. Mortgage brokers would be required to determine whether the mortgage they're selling to a borrower is affordable, and prepayment penalties would be banned or restricted. Hidden fees that compensate a broker for selling higher-cost loans would be banned.
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Loan originators and the sponsors of securitizations could also be required to retain 5% of the credit risk of a mortgage, requiring them to have "skin in the game," or a stake in the outcome of the loan originated, said Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development.
That requirement -- along with all of the reforms, really -- could cost consumers more for their mortgage, perhaps adding as much as a half a percentage point to their mortgage rates, said Cameron Findlay, chief economist for LendingTree.com. In addition, lenders who can't afford to make the procedural changes might be forced out of business, which could effectively decrease competition, he added.
"It's going to create a situation where banks and brokers alike are going to make sure that their costs are covered for any adjustment to their process," Findlay said.
But, Findlay said, any extra costs would be worth it to restore faith in the system and protection for consumers. Also, it's a drop in the bucket compared with what it's costing to clean up the havoc created in the mortgage market and the entire economy when mortgage money was easy to get.
"How can it possibly cost consumers more than what it has already cost this nation?" Taylor said.
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Clear disclosure 'worth it'
Even if lenders ultimately are forced to make fewer loans as a result of new regulation, the consumer protections are still worth it, said John Sullivan, president of the National Association of Exclusive Buyer Agents."I would rather people have more difficulty getting the loan than getting a loan they can't afford to pay in three years," he said.
At their heart, the reforms intend to force clear disclosure in the mortgage market so consumers can compare mortgage products on an apples-to-apples basis -- with easy-to-discern costs so that lender-to-lender comparisons are more straightforward. The goal is for people to always pick a mortgage based on what is actually being offered, not how it is worded or what is presented -- like they'd buy any consumer good, based on the product inside and not the packaging in which it's wrapped, Taylor said.
"Do you offer the best widget or don't you? It shouldn't be the best slogan or the best box," Taylor said.
Continued: Reforms still a way off
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