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Despite Wall Street reform mortgage banker profits surge

Despite worries that the Wall Street reform legislation passed last summer would crimp earnings, the Mortgage bankers Association is reporting that profits per loan soared in the third quarter.

“Independent mortgage banks and subsidiaries made an average profit of $1,423 on each loan they originated in the third quarter of 2010, up from $917 per loan in the second quarter of 2010,” according to the Association.

In addition, the MBA also reported that “88 percent of the firms in the study posted pre-tax net financial profits in the third quarter of 2010, compared to 85 percent in the second quarter of 2010 and 82 percent in the third quarter of 2009.”

These are strong results. Initial worries that federal mortgage reforms would hinder industry profits have proven wrong.

Good Faith Estimates

After 14 years of wrangling the government introduced a new Good Faith Estimate form this year which HUD says can consumers as much as $700 per transaction.

The new GFE is a three-page form designed to show total loan costs — NOT total closing expenses. By obtaining a GFE and not a “worksheet” or something else consumers know that lenders are obligated to deliver loans with certain terms and conditions by closing, assuming that the value of the property and consumer information satisfy required loan criteria.


HUD-1

The new GFE ties into a new HUD-1, the summary form which settlement agents must use as closing. The new HUD-1 is designed to clearly explain all transaction costs, including taxes, title insurance and closing expenses — and to show the costs being paid by buyers and sellers.

An important part of the new HUD-1 is that a portion of the information it shows comes from the lender’s GFE. In other words, borrowers can look at the HUD-1 to assure that rates and terms promised with the GFE have been delivered.

Dodd-Frank

The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203), passed this summer despite strong industry opposition, established new protections for borrowers.

In basic terms, the new protections include restrictions against financial steering and a new duty of care requirement. Lenders can obtain a “safe harbor” to protect against lawsuits and reduce reserve requirements when they originate qualified residential mortgages. QRMs are defined essentially as conventional, VA and FHA mortgages with three or fewer points and origination fees and fully documented (full docs) loan applications.

An interesting twist with Dodd-Frank is that it allows prepayment penalties for QRMs but NOT for unqualified mortgages. The maximum prepayment penalty is restricted to three percent of the loan amount in year one, two percent in year two and three percent in year three.

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