Has Mortgage Lending Gotten Better Since Wall Street Reform?

Has lending really gotten better for borrowers during in the past few years?

Certainly mortgage rates have improved. In recent weeks they have been at or near historic lows. But no less important the lending system has improved. It’s not just that mortgage rates are better, it’s also that the probability of getting a good loan has gone up.

Let me provide three examples:

First, since January 2010 lenders have been required to use a new good faith estimate form. This is a big deal because HUD estimates that the new GFE will reduce borrower costs by $700 per transaction.

Second, there are no more yield spread premiums (YSPs).

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act lenders can no longer collect additional fees by selling more expensive loans. In other words, a lender was paid extra money — the yield spread premium — by hiking up the interest rate.

For instance, if you qualified for a loan at 4.5 percent on the basis of your credit standing and a lender sold you a loan at 5 percent, the lender got additional money out of the deal — and you got a higher mortgage cost for the entire loan term.

The ban on yield-spread premiums, of course, is just one reason why lenders want to revoke, revise and refine Wall Street reform.

Third, Wall Street reform has created a category of loans called qualified residential mortgages or QRMs. Lenders who offer QRMs do not have to set aside 5 percent of the loan amount in a reserve fund and they are protected against borrower lawsuits.

So what’s a QRM? The usual definition is that a qualified residential mortgage under Wall Street reform is a VA, FHA or conventional mortgage originated with a full-docs loan application and with points and fees that equal 3 percent or less of the loan amount.

Lenders, in some cases, also don’t like the QRM standards under Wall Street reform. They want the right to make riskier and more-profitable loans.

But what about the future? Won’t all loans require 20 percent down?

Nope. QRMs plainly do not require 20 percent down and they represent they overwhelming majority of the loans that borrowers want and get.

So, yes, loans are better today then they were a few years ago. Add up the changes big and small and the mortgage you get today will be less risky and less costly than loans from just a few years ago.

For all the carping and complaining about the new mortgage market, the reality is that what we’re really seeing is a return to the 1990s — a period when there were no option ARMs, interest-only loans were rare, and no-doc loan applications were expensive and uncommon.

In other words, rather than “affordability” loan products and “non-traditional” loan applications, we’re going back to mortgages and underwriting that proved successful and low risk for decades.

The crime, of course, is that we veered from these standards in the first place. There would literally be no mortgage meltdown today, no financial crisis, if we had stuck with the old, boring, dependable lending standards that worked so well. There would be no worries about mortgage-backed securities and no needless losses for bank shareholders and mortgage investors. With proper loans there would be no foreclosure spike and thus no incentive for robo-signing.

Unfortunately, our federal regulators failed to regulate and the result is the mess we have today.

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