If the proposals for a federal Consumer Financial Protection Agency comes to fruition, below are some changes a mortgage shopper might expect.
Less paper
Anyone who has gotten a mortgage knows just how much paperwork is involved.
Forms today are "too many and too complicated” and could be clearer, said Marc Savitt, immediate past president of the National Association of Mortgage Brokers.
Alex Pollock, in testimony to the House Financial Services Committee, said that the one good idea that has emerged from the reform proposals has been the proposed requirement of clear and simple disclosures. Pollack is a resident fellow at the American Enterprise Institute for Public Policy Research.
"In congressional testimony in the spring of 2007, I proposed a one-page mortgage form so borrowers could easily focus on what they really need to know. The one-page-form idea was included in change bills in both the House and Senate, but not enacted, unfortunately. It remains my opinion that something like it would be a huge improvement in the way the American mortgage system works,” he said.
With better disclosures, borrowers can be better able to "underwrite themselves,” he said, making sure they understand the debt commitments they are making.
‘Plain vanilla’ mortgages
What would a "plain vanilla” mortgage be? Most likely a 30-year fixed-rate mortgage and possibly other basic loans, such as a five-year adjustable-rate mortgage, said Richard Thaler, a professor of economics and behavioral science at the University of Chicago Booth School of Business.
That doesn’t mean you couldn’t get a more complex product, just that you have to see more basic options first.
To obtain a mortgage with more complicated terms, "people would have to opt into them and be warned that they would be doing something unusual,” he said of the more complex mortgage products.
Thaler is co-author of the book "Nudge,” which examines scenarios that "steer people in the direction that is likely to be helpful and warn them about things that are likely to be dangerous.”
A "plain vanilla” mortgage encourages borrowers to opt for a certain basic mortgage type without banning other choices, he said.
This system could help prevent consumers from agreeing to complex terms they don’t understand, when they might otherwise have chosen a simple, basic product.
Case in point: John Sullivan, president of the National Association of Exclusive Buyer Agents, recently was involved in a transaction with sellers who didn’t realize they had an interest-only loan until five years later when they wanted to sell the property; without paying principal on a loan, they didn’t build equity.
Certain fees banned
Prepayment penalties, or costs you’re charged if you want to pay a mortgage off early, could be banned or restricted by this proposed agency. At its worst, consumers get trapped in mortgage terms that aren’t right for their situation because they can’t refinance unless they pay the penalty fee.
Consumers may not even notice another fee that could become extinct because they’re not easy to spot to begin with: Yield spread premiums. Shaun Donovan, secretary of the Department of Housing and Urban Development, called them "unfair practices” used by lenders to encourage brokers to sell riskier and higher-priced loans.
From the industry perspective, Savitt said the premiums are a way consumers can finance origination costs over time.
He said that costs built into the interest rate — both from brokers and lenders — should remain permissible, but that "it’s important that everything be disclosed on both sides,” meaning both brokers and lenders should disclose all fees embedded into the rate.
Less paper
Anyone who has gotten a mortgage knows just how much paperwork is involved.
Forms today are "too many and too complicated” and could be clearer, said Marc Savitt, immediate past president of the National Association of Mortgage Brokers.
Alex Pollock, in testimony to the House Financial Services Committee, said that the one good idea that has emerged from the reform proposals has been the proposed requirement of clear and simple disclosures. Pollack is a resident fellow at the American Enterprise Institute for Public Policy Research.
"In congressional testimony in the spring of 2007, I proposed a one-page mortgage form so borrowers could easily focus on what they really need to know. The one-page-form idea was included in change bills in both the House and Senate, but not enacted, unfortunately. It remains my opinion that something like it would be a huge improvement in the way the American mortgage system works,” he said.
With better disclosures, borrowers can be better able to "underwrite themselves,” he said, making sure they understand the debt commitments they are making.
‘Plain vanilla’ mortgages
What would a "plain vanilla” mortgage be? Most likely a 30-year fixed-rate mortgage and possibly other basic loans, such as a five-year adjustable-rate mortgage, said Richard Thaler, a professor of economics and behavioral science at the University of Chicago Booth School of Business.
That doesn’t mean you couldn’t get a more complex product, just that you have to see more basic options first.
To obtain a mortgage with more complicated terms, "people would have to opt into them and be warned that they would be doing something unusual,” he said of the more complex mortgage products.
Thaler is co-author of the book "Nudge,” which examines scenarios that "steer people in the direction that is likely to be helpful and warn them about things that are likely to be dangerous.”
A "plain vanilla” mortgage encourages borrowers to opt for a certain basic mortgage type without banning other choices, he said.
This system could help prevent consumers from agreeing to complex terms they don’t understand, when they might otherwise have chosen a simple, basic product.
Case in point: John Sullivan, president of the National Association of Exclusive Buyer Agents, recently was involved in a transaction with sellers who didn’t realize they had an interest-only loan until five years later when they wanted to sell the property; without paying principal on a loan, they didn’t build equity.
Certain fees banned
Prepayment penalties, or costs you’re charged if you want to pay a mortgage off early, could be banned or restricted by this proposed agency. At its worst, consumers get trapped in mortgage terms that aren’t right for their situation because they can’t refinance unless they pay the penalty fee.
Consumers may not even notice another fee that could become extinct because they’re not easy to spot to begin with: Yield spread premiums. Shaun Donovan, secretary of the Department of Housing and Urban Development, called them "unfair practices” used by lenders to encourage brokers to sell riskier and higher-priced loans.
From the industry perspective, Savitt said the premiums are a way consumers can finance origination costs over time.
He said that costs built into the interest rate — both from brokers and lenders — should remain permissible, but that "it’s important that everything be disclosed on both sides,” meaning both brokers and lenders should disclose all fees embedded into the rate.
