If you are out house hunting or looking for investment property, then you may want to pay attention to the new legislation that was signed into law by Barack Obama on July 21st, 2010. This new financial reform bill will make a few key changes to the mortgage market as we currently know it.
No, you will still have to deal with many of the same band of characters that you have come use to encountering during a real estate transaction; the real estate agents, mortgage brokers, real estate appraisers, and home inspectors. The changes to the mortgage process are not effecting these staples of the industry.
But the fact remains that there are several items to this bill that will profoundly change the type of mortgage you end up with after going through this process with the banks.
“The interface with a broker or a lender won’t change,” says John Taylor, president and CEO of the National Community Reinvestment Coalition. “It’s just what the broker and lender is offering will be screened to protect the consumer from getting bad loans.”
Let’s take a look at the real estate related changes that are in the financial reform bill that you need to be aware of at this point.
Real Estate Affects of the Financial Reform Bill
1. Repayment Evaluation. One of the main reasons many of the people defaulted on their mortgages over the past few years is because they couldn’t afford them in the first place. The financial controls had gotten so bad that people were able to obtain mortgages without showing any proof of income that would support paying the mortgage. Well, those days are over. And these basic changes to the mortgage process should ensure that we don’t go down this road of default and a slumping housing market again anytime soon.
2. Incentive Structure. This was a crazy idea in the first year. But before the bust of the housing market, mortgage brokers were paid more money or financial incentives if they talked home buyers into more risky loans with higher interest rates.
The new law, which doesn’t take effected untile April 11th, 2011, eliminates this option for the mortgage brokers. They will be paid the same no matter what type of loan they put on the borrower. Hopefully, this will detour much of the pushing of bad mortgage options on the borrowers and keep our housing market from the glut of homes that people cannot afford.
3. Risk Retention. This is by far one of the best pieces of the new financial reform bill if you ask me. I say that because much of the problems we faced in the past was with loan originators creating credit risky loans, packing them up together, and selling the bulk off to the secondary market without any worries. They didn’t have any worries because once they sold the loans to the secondary market, they had no obligations to the loans at that point. So, they could package bad loans, sell them, and have no risk if the loans blew up.
The new financial reform law says the originators of the loan retain 5% of the risk of the loans they sell on the secondary market. This is not a large as we might have liked their retention risk to be, but it is a great start and should make a significant difference on the types of loans that borrowers are put into because the originators retain so much risk in the loan.
4. New Consumer Watch Dog Agency. The new financial reform bill creates a federal agency that is designed to protect consumers as they acquire financial products of all kinds. This agency will have rule-making authority to watch the financial markets, banks, credit unions, payday lenders, and all loan services. The goal of this agency is to rid the market of all the unfair and predatory loan practices that we have grown use to these days.
5. Streamlined Disclosures. This is something that should have been in place many years ago. The idea is to rid all but one of the agencies that create the disclosures you must or should read in your loan documents. Anyone that has purchased real estate and attended a closing knows you receive a large stack of papers that are disclosures to your loan.
This process is aimed at minimizing that paper load, streamline the process and hopefully make the loan documents more understandable.
What do you think of the new financial reform laws? Are they just what the real estate doctor ordered or more overkill by the Government attempting to appear as if they are trying to solve the issues?
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