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Bank Regulators Introduce New, Stricter Mortgage Loan Proposal

By the Mortgage Guy /

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As a result of the financial meltdown that took place in America between 2007 and 2010 H.R. 4173 Dodd-Frank Act was enacted at a time when the U.S. economy was faltering and trying to right itself. The Dodd-Frank Act is a big part of the concerted effort to avert future disastrous economic problems, while revamping our system of financial services regulation with new controls on large and systemically significant institutions. It has also created an agency to administer consumer banking transactions that previously were exempt from the supervision of regulators. The Dodd-Frank Act is a big part of the United States modernizing and bringing bank regulations up to the current needs of the nation.

The basic impetus to this new law is most definitely consumer protection as well as accountability for Wall Street, large banks and institutional lenders. While consumer protection and corporate accountability are the larger part of the Dodd-Frank Act, the real estate industry is also affected to a degree. Many of the law’s rules have already been sorted out and will continue to be over the next year, further the comment period for some rules continues and this final rulemaking period will carry on for the next year or so.

For prospective homeowners looking to invest the mortgage approval process has become fraught with roadblocks as a direct result of lender tightening and intense underwriting scrutiny. Lenders are asking for much larger down payments, twenty five to thirty percent in some cases, way above average credit scores of 800 plus, and a deluge of paperwork and documentation before approving any new loans.

The borrower’s associated fees for financing have also increased because of the new Fannie Mae and Freddie Mac charges that can be applied to off-set the cost of supposed risk factors. In some cases well-qualified buyers with credit scores of 800 or more who have a twenty-percent down payment or more can be charged an extra quarter percent of the loan amount if they have decided to buy down the rate via the cost of points.

Example: On a $300,000 mortgage, you'll be charged an extra $750 at closing. The extra quarter percent is relinquished if the borrower were to provide a $75,000 down payment. This fee can increase if the buyer has a lower credit score, provides less of a down payment and other possible risks are associated with the loan.

As of April 1, 2010 the Dodd-Frank bill regarding mortgage compliance requirements has gone into effect. A big part of the Dodd-Frank Act, and how it relates to real estate and home sales, is how mortgage brokers and other loan originators are compensated. Because the Dodd-Frank Act disallows mortgage originators from basing their charges on the interest rate, or terms of the loan, borrows are shielded from unscrupulous lenders who wish to push them into loans with higher interest rates in order to receive higher fees. However if the lender can show that they have acted in the best interest of the borrower it will be allowed in certain cases.

Lenders are still allowed to base their points on the amount of the loan. But under the new provisions they are not allowed to charge both the buyer their fees and still receive an origination payment from the lender. Despite the good intentions of this legislation, and its intent to protect and safeguard consumers, buyers may encounter difficulties when they seek approval for mortgages. If a buyer is not certain if he wishes to secure a loan with points, or not, the new Dowd-Frank Act can make the decision process even more difficult if they later wish to switch to the other. Over all, expect the time it takes to get approved to now take longer in many cases.

Another change in law that affects real estate has to do with appraisers. The approval of a mortgage is more often than not contingent on a good appraisal being given to the originator from their underwriter.  In the past loan originators were allowed to pick who would do the appraisal, now they are forbidden from doing that. This is a change in the Fannie May rules and affects many people because appraisals that come in lower than the price the buyers have agreed to pay can cause a transaction to evaporate. They are also forbidden from having any express contact with the appraiser for the duration of the appraisal process.

It has now become a common practice for some mortgage lenders to employ third-party appraisers so that they are not operating outside the new guidelines.  In some cases this has been a good arrangement but in others it has not. It is becoming evident that some of the third-party companies which are not from the same locality do not know the local markets, and so there appraisals are not as accurate as they should be. The up-side of all of this is that more third-party appraisal companies have started to spring up nationwide and they specialize in their local markets.  These third-party appraisers are appointed by staff working for lenders that are not directly involved in loan origination so that there is no conflict of interest and they are operating within the new law’s constraints. 

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