Big Mortgage Changes Coming in 2011.

For the past year or so, a series of policy and procedural changes have rocked the mortgage world as the banks and regulators attempt to avoid the lending mistakes of the past.

These changes have been incremental involving appraisal procedures, consumer disclosures, new underwriting rules and finally the Dodd-Frank Financial Reform Bill which affects how loans are originated.

Prior to the collapse of the housing market mortgage, brokers, as opposed to banks and direct lenders, originated about half of all mortgage loans in this country. Many of the abuses involving appraisal fraud and "liar loans" were blamed on the brokers, perhaps unfairly. Testimony before Congress clearly indicated that the malfeasance started at the top on Wall Street and worked its way down through the entire system. The Banks, rating agencies, appraisers, mortgage originators…everybody needs to share in the blame. 

That said, starting this year, it will be a brave new world as a host of new regulations go into effect. The biggest change will be in how loan officers are compensated and how they now must now offer their applicants the lowest cost mortgage product for which they are qualified. In the past, a mortgage broker was compensated primarily by the Yield Spread Premium (YSP), which was a sum of money that the lender paid the broker for arranging the loan. It was directly proportional to the rate on the loan and was largely hidden from view by the customer. The higher the rate, the more money the broker made. Starting next year, Yield Spread Premiums will be largely prohibited and broker compensation must be clearly stated as part of the origination fee. This policy has made the mortgage broker business less attractive and increasingly loan volume is migrating to the banks and direct lenders. In addition, lenders are now legally and financially responsible for the actions of the brokers from whom they buy mortgages. Increasingly banks are limiting or shutting down their “wholesale” business where they loan from brokers.

It remains to be seen whether this is good for the consumer. It clearly results in less competition, as the mortgage business gets concentrated into the hands of fewer participants.

This is all part of a continuing effort on the part of HUD and the Federal Reserve to increase consumer transparency in mortgage transactions. HUD has long advocated that consumers should be able to look at just a few numbers to compare the cost of buying a home.   The simplification of the HUD-1 Settlement Sheet went a long way. Now the borrower can look at one number to see what the loan really costs, the APR and the new Good Faith Estimate. That form now aggregates all the lenders fees into a single number and a single percentage rate. It includes the interest rate on the loan, origination fees, discount points, and any mortgage insurance.  It allows the buyer to compare the origination fees and the APR of several lenders for the same product. 

Additional changes will affect appraisals a well. Fraudulent or coerced appraisals were blamed  for many of the bad mortgages. As a stopgap measure, the Home Valuation Code of Conduct was adopted  to outlaw the coercion of appraisers. Many people believe the resulting solution was worse than the problem. There were widespread complaints of "low-ball" appraisals resulting from defective work by inexperienced appraisers who were being under-compensated by the lenders or their designated appraisal management companies. Recent rule-makings by the Federal Reserve now require that appraisers have local experience and be fairly compensated for their work. Better quality appraisals are the hoped-for result.