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Federal regulators from 5 agencies have proposed a new set of disclosure requirements on lenders to try to stop the lender from allowing the borrower to take a mortgage that is not suitable for them. Instead of trying to amend existing requirements they would simply add new requirements to the list. Given the methods used in selling a mortgage, a new disclosure added to the existing disclosures can not be effective unless it hits the mortgage shopper right between the eyes and cannot be swept aside by loan officer and mortgage brokers as unimportant. Many of the mortgage shoppers ignore the disclosures they are told because there are already so many of them and most of it is useless garbage. The borrowers don't know how to sort through the garbage to get to the ones that are important to them and their situation.
In many cases loans are considered to be affordable when the loan is approved, but turn out to be unaffordable. No loan provider makes loans that are known to be unaffordable. The exception to that would be a collateral lender and a scam artist. If there are too many unaffordable loans that would mean that underwriting requirements are too loose. Underwriting requirements have rules that must be met for the loan approval. These rules cover the down payment, housing expense to income ratio, property type documentation income and assets, credit score, loan purpose and other factors. There is no questions that standards have become more lax over the years, as lenders have learned how to offset high-risk factors with low-risk factors. The positive side of this is that it has become easier to become a homeowner for more households who would not have been able to get a loan years several ago. Refinances that are not in the best interest of the borrower are a problem. Sometimes a borrower will be faced with a refinance deal that will make him poorer, but is unable to see it. Refinances that are involved with no benefit to the borrower are associated with aggressive marketing by mortgage brokers or loan officers. They will drum up refinancing business with borrowers who never thought about refinancing their loan. Interest-only mortgages and option adjustable rate mortgages are their tools of choice. The proponents of the suitability standard would make loan providers responsible for assuring that a refinance has a net tangible benefit for the borrower. All refinances provide a tangible benefit to the borrower or no one would do them, but a net tangible benefit is very important. Under the suitability rule the loan provider must determine whether or not the benefit out weighs the cost. |
