WASHINGTON — Addressing a fundamental cause of bad home loans that are now crippling the national housing market, the Department of Housing and Urban Development on Friday proposed a new standard to force lenders to explain clearly to borrowers, on a single page, the complicated terms of mortgages being offered.
"Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table, and that's been one of the factors driving the current housing downturn. Our proposal fixes that," HUD Secretary Alphonso Jackson said.
It's been three decades since the Real Estate Settlement Procedures Act has been updated. The complexity of today's closing process is widely believed to have allowed unscrupulous mortgage brokers and others who originated home loans to dupe homebuyers into complex loans with adjustable rates and unexpected balloon payments.
Under the proposed changes, which will be put out for public comment before final action, all loan originators would have to provide prospective home buyers with a four-page good-faith estimate about the total costs involved in taking out a mortgage. This would serve as a check sheet to weigh against a final closing document.
On the front page of this proposed good-faith estimate, already tested by HUD on a sample of consumers, the precise interest rate is spelled out clearly. Also specified are whether that rate can adjust, whether the loan balance can adjust, whether there are prepayment penalties that discourage refinancing to a more favorable loan before a certain period, whether there are balloon payments and whether there is an escrow account that collects and pays property taxes and home insurance.
As home prices surged nationwide from 2001 to 2006, lending standards weakened and loan originators — more often than not mortgage brokers — confused first-time and lower-income borrowers with stacks of paperwork and a complicated process. Many borrowers now say they didn't understand that they were offered teaser rates that would adjust to much higher monthly payments. Others said they were promised specific monthly payments, not knowing that they didn't include the cost of property taxes and insurance.
Such practices led to many loans going bust. The latest dismal reading by the Mortgage Bankers Association found that one in 20 home loans is now past due by at least 30 days. One in five adjustable-rate loans given to subprime borrowers — those with the weakest credit histories — is now delinquent.
Mortgage brokers originated an estimated three-fourths of subprime loans, which are now considered toxic and roiling the Wall Street investors who bought mortgage bonds that contained them. Mortgage brokers have resisted efforts to require greater disclosure and simplification. Federal Housing Administration Commissioner Brian Montgomery, in a conference call with reporters, took them to task.
"It is no longer acceptable to stand in the way," said Montgomery, who was a lone voice several years back in warning of mounting abuses in home lending. "It's time we open the shades and let the sun shine on this mortgage process."
Although it's too late for such changes to help troubled homeowners now, the pieces are falling in place to correct the weaknesses in mortgage lending, oversight and finance for the future. A presidential working group on Thursday outlined proposals to boost oversight, and the Federal Reserve proposed new rules late last year for high-priced loans.
The Fed rules, which could take effect this month, attack deceptive advertising, force lenders to verify income and ability to repay, substantially limit the use of prepayment penalties and force subprime lenders to create escrow accounts to collect payment for taxes and insurance.
Friday's new HUD proposals also force loan originators to spell out when they're receiving fees from lenders for putting consumers in higher-priced loans than they qualify for. This is called a yield-spread premium and was widely abused. Many in Congress want to ban this practice altogether; HUD proposes greater disclosure.
Speaking to a housing conference Friday, Federal Reserve Chairman Ben Bernanke said his proposed rules would force loan originators to get agreement in advance from borrowers that they're being placed into a higher priced loan than they qualify for.
"Consumers who do not understand this point will not shop to their best advantage," Bernanke said.
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HUD's proposed good-faith estimate.