More finger-pointing has led to yet another mandate from the Federal Reserve that will cost homebuyers money.
First they pointed their fingers at appraisers – blaming them for inflated values that led to the collapse of the housing sector. The result was the addition of a 3rd party to come between appraisers and lenders, real estate agents, and consumers.
Of course that 3rd party had to be paid, so it increased costs to home buyers. But that wasn’t the worst of it. They began hiring low-cost appraisers who didn’t even know the local markets – which made a complete mess of appraisals. Fortunately, they’ve realized that didn’t work so well.
So now they’re focusing on mortgage lenders – blaming them for the collapse.
Has everyone forgotten that it was government programs that resulted in the creative financing that put low income borrowers into homes they could not afford when their adjustable rate mortgages reset?
At any rate, the newest regulations coming from the Federal Reserve – called the “Final Rules” – are set to drive costs up for home buyers. By dictating how a mortgage lender can be paid, they are effectively removing competition from the marketplace.
And as we all know, competition is the lifeblood of free enterprise.
The rule change is intended to prevent loan originators from damaging consumers by receiving too much compensation for their services. Lenders will continue to receive fees based on a percentage of the loan amount, but will be prohibited from collecting a YSP – or yield spread premium.
This was a fee paid to mortgage loan originators for directing borrowers to a higher percentage loan. And some mortgage lenders did keep that fee for themselves.
However, what they fail to mention is that in a competitive free enterprise market, many lenders were using this YSP to offset their buyer’s closing costs. This is how lenders were able to offer no-cost mortgage loans to borrowers who were short on cash.
Yes, many failed to disclose this. But many others did not. They explained to their buyers that by paying a slightly higher interest rate, they could get their closing costs reduced or eliminated.
Left alone, the free market naturally drives more business to lenders who “disclose and share” than to those who don’t. That’s how competition works.
But… under the new “Final Rules” there will be no such thing.
The new rules also state the government will provide a “safe harbor” for borrowers to ensure that they are not “steered” toward unfavorable loans in order to financially benefit the loan originator. We aren’t sure how this will work, but it looks like they’ll be adding another set of government employees for taxpayers to support.
Under these rules lenders will be required to present facts and figures for each type of loan – such as fixed rate, adjustable, or reverse mortgages. Those options must include the lowest interest rate for which the consumer qualifies, the lowest points and origination fees, and disclosure of the lowest rates available for loans that don’t have risky features.
Risky features are defined as those with prepayment penalties, negative amortization or balloon payments within the first 7 years.
These rules go into effect on April 1, 2011, so more details will likely be revealed in the coming months.
But this isn’t all… The Dodd-Frank Wall Street Reform and Consumer Protection Act also promises to restrict compensation to mortgage lenders. We have yet to see what their rules will entail.
The best we can hope for right now is a new Congress – one that believes in a reduction in government interference in the free enterprise system.
Author: Mike Clover
CreditScoreQuick.com
