Simply The Best Loans

Please note the statistical information in the following post is from the Commonwealth of Virginia, however, the overall outline of the differences in regulations governing different types of lenders may apply in other states as well. For those living elsewhere in the US, you should review the regulations for your particular state.

In 2006, The State Corporation Commission of Virginia reported the number of mortgage lenders and brokers it supervised at 2,952. Not included in this number, however, are federal banks, credit unions or commercial banks with “National” or “N.A.” in the name. What does this mean to Virginia consumers?

All mortgage brokers and wholesale lenders are required, by law, to disclose all fees, yield spread premiums, etc. paid on the settlement statement (HUD-1) at closing, since they are licensed by the SCC. Banks, however, are not. Consumers can be duped into believing they are saving money when dealing with these institutions because the fees they would normally find on their settlement statement from a mortgage broker or wholesale lender do not have to be disclosed by the banks. In addition, because the disclosure rules are not consistent across all institutions, some banks advertise programs that appear to the consumer as having ‘no fees’.

Any loan, no matter who the lender is or what loan program the consumer qualifies for, has costs associated with it. NO LENDER DOES LOANS FOR FREE!!! If the institution lending money to the borrower claims there is no cost for the loan, it only means the cost is not transparent to the borrower. It has been buried in the loan as a higher interest rate, a yield spread, a prepayment penalty, the loan balance or a combination thereof.

Borrowers should always ask the credit score(s) being used to determine their qualification by any lender. If their credit score is 720 or higher, special programs usually do not provide any savings to them and are better off with a conventional fixed-rate program. Sales pitches for ‘Special or First-Time Buyer Programs’ are unnecessary because these programs generally have a higher cost built-in to the program due to their broader underwriting guidelines and are specifically designed for borrowers with less-than-superior credit. Therefore, they are not cost-effective for a borrower with excellent credit.

The slow down in new mortgage applications in recent months has caused lenders to begin advertising ‘no closing costs’ loans as a means of soliciting new applications. Unless the borrower is well informed on the mortgage process and able to clearly read ‘the fine print’ of all the disclosures thoroughly and understand them, the likelihood that they may pay costs that they are unaware of is fairly significant.

This is one more area within the mortgage industry where advertising hype and inequitable regulation can result in higher costs to consumers.

Consumers will not be able to make their best mortgage choice until the mortgage process, all disclosures and fees are transparent to them, regardless of whether the lender is a broker, wholesale lender, credit union or federal bank.

In 2003, congress passed a law for Fair and Accurate Credit Transactions entitled Financial Literacy and Education Improvement. This law called for the establishment of the Financial Literacy and Education Commission. The Commission established and sponsors/hosts the website www.mymoney.gov. This website is essentially an index or a collection of links to other Departmental websites containing consumer information–some of it is useful, but consists largely of static text, the content of which is general in nature and requires the reader (1) to be highly literate, and (2) to do further, extensive research.

National Strategy for Financial Literacy-2006 and, subsequent addendum, clearly calls for more consumer education, but stops short of defining the means by which to do so. This is in spite of the presence of a number of financial literacy training advocates among the Commission’s working groups.

Treasury Secretary Henry M. Paulson, Jr. spoke on October 16, 2007 at the Georgetown University Law Center on Current Housing and Mortgage Market Developments and stated,

“…Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy.”

In the later half of his speech, he makes a number of statements which, inside the beltway, are considered a clear “call to action.”

“We need simple, clear and understandable mortgage disclosure. We must identify what information is most critical for borrowers to have so that they can make informed decisions. At closing, home buyers get writer’s cramp from initialing pages and pages of unintelligible and mostly unread boilerplate that appears to be designed to insulate the originator or lender from liability rather than to provide useful information to the borrower. We can and must do better.”

“Borrower’s have a responsibility as well. Mortgage providers must offer clear, transparent and understandable information on the mortgage products they sell. And home buyers have a responsibility to use that information. Buying a home today is a complex process, but than in no way excuses home buyers from their obligation for due diligence. Just as investors in the stock market have a responsibility to understand the risks associated with their investment, home buyers have a responsibility to understand their mortgages.”

“…we need to bring a higher level of integrity to the mortgage origination process. The development of a uniform national licensing, education, and monitoring system for all mortgage brokers is worth considering.”

It takes little effort or imagination to connect-the-dots from the Financial Literacy and Education Improvement Act of 2003 to the National Strategy for Financial Literacy of 2006 to Secretary Paulson’s comments, delivered just prior to a well-publicized meeting with the G7 Finance Ministers.

On October 22, US Representatives Brad Miller (NC 13th), Barney Frank (MA 4th) and Mel Watt (NC 12th), introduced HR-3915-The Mortgage Reform and Anti-Predatory Lending Act of 2007 in the House Financial Services Committee, where Rep. Frank presides as Chairman. This could be cause for concern if regulatory action, once implemented, becomes burdensome and costly to both the industry and consumers.

While the overarching problem effecting the mortgage industry is diverse and disparate in its origins, implementation of (1) a well-managed certification and accreditation program for mortgage professionals, (2) paralleled by a concerted effort to lift the veil of complexity on mortgage-buying for consumers, are an essential part of any solution whether devised by government or industry, and will serve to keep us from repeating this situation again when the market returns to good health.