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.

Has Mortgage Lending Gotten Better Since Wall Street Reform? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Until this point HUD has generally allowed lenders to offer their own Good Faith Estimate of Closing Costs, however the new standard form for all lenders — a form that took 14 years to develop — will finally assure that borrowers actually understand what’s being charged for their loans, why and by whom.

“The mortgage crisis,” says former HUD Secretary Steve Preston, the last HUD secretary appointed by President Bush, “was fueled in part by people agreeing to mortgages that they ultimately could not afford. In some cases, people didn’t understand or know that their mortgages could result in large payment increases after just two or three years. Others did not recognize the total costs that come with homeownership. And others paid higher loan origination and closing costs simply because they did not know about other affordable options.”

So what makes this form better?

First, it’s a three-page document that every lender will have to use — meaning that offers from lenders will be the same and can readily be compared.

Second, the document is not just a list of fees and charges, it also explains in basic terms the purpose of each expense.

Third, mortgage brokers will have to show their yield-spread premiums (YSPs), costs which Preston says were “rarely understood by, or fully disclosed to, borrowers. These premiums are directly tied to the higher interest rates that borrowers pay. Consumers deserve to understand this and they need to get credit for essentially paying these premiums.”

Page One

The first page is actually a summary of loan costs — the specifics are found on page two.

Item 1 tells you how long the quoted rate and terms last. Items 3 and 4 concern loan lock-ins — how long the rates and terms will last if you lock them in at the time the GFE is issued.

The loan summary tells you the amount of the loan, the initial loan rate and monthly payment. IMPORTANT: If you have an ARM the next few items will tell you:

• How high the interest rate can go.
• When the interest rate can first rise.
• The maximum monthly payment you can expect.
• If a prepayment penalty is allowed and, if yes, how much it will cost.
• Whether there is a balloon payment at the end of the loan terms.

Next the form will tell you whether the lender will create an escrow or “trust” account to collect money each month for property taxes and insurance. Generally, if you buy with less than 20 percent down an escrow account is required by the lender.

Finally, the form adds your origination charges (the “A” items on page two) with other settlement costs (the “B” items on page two). Be aware that you can have additional costs at closing, depending on how the sale agreement is written.

Page Two

The second page is divided into two parts, A and B. Part A looks at “origination” fees, the cost to buy your mortgage.

First, the form shows your origination fee in a dollar amount, including any yield spread premium (YSP). Under the old rules, the yield spread premium could be shown as either a dollar amount or as a percentage of the loan. Now, the entire cost of the loan, including any YSP, is shown as a single dollar amount.

Next, the form shows if your interest rate is being impacted by the origination fee. In other words, let’s say you can borrow $100,000 at 6 percent interest over 30 years with no points. This is called the par pricing for this loan. But, let’s say that you could also borrow $100,000 at 5.75 percent — if you were willing to pay 1 point at closing. A point is equal to 1 percent of the loan amount or $1,000 in this case. The form shows if you are paying for any reduction of the interest rate OR any increase in the rate by paying a smaller origination fee.

Next we go to part B. This part of the form shows the cash costs you can expect to pay at settlement (or escrow) when the loan closes. As the bottom of part B is a total which shows “Your Charges for All Other Settlement Services.”

The totals for parts A and B are then shown at the bottom of the page and on the bottom of page one as well.

HUD encountered considerable opposition from the lending industry, especially with regard to the question of how yield spread premiums should be disclosed. In an important decision which reviewed 14 years of effort to update the good faith form, a court found in 2009 that HUD had acted fairly and in the public interest with the form it produced.

Page Three

The last page should really be the first page because it contains instructions for understanding the form.

The first section lists charges that the lender cannot increase, charges that can rise by as much as 10 percent, and charges that change prior to settlement. This is important information, it means that you should check the numbers on your good faith estimate with the final figures presented to you at closing.

Next, HUD gets into the issue of higher or lower settlement fees. In the same way that mortgage loans have par pricing, so does the settlement process. In other words, if you are willing to pay a somewhat higher interest rate you may be able to lower your cash costs at closing. Indeed, you may not have to bring any cash to closing.

In the third section HUD offers borrowers the opportunity to compare loan offers from different lenders. This is important because borrowers should look at different loan offers to find the rates and terms which best meet your needs.

Lastly, HUD notes that your loan may be sold in the future. If so, after settlement “any fees lenders receive in the future cannot change the loan you receive or the charges you paid at settlement.” Translation: A contract is a contract.

HUD estimates that the new form will save typical borrowers $700 each time they finance or refinance a home. That’s a lot of money, but more could be done to cut borrower costs — and it shouldn’t take 14 years to make additional changes.

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Copyright 2009 Peter G. Miller. All Rights Reserved. Use of this material without permission is illegal, however direct links to this page are welcome.

How To Read The New Good Faith Estimate Forms is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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