The Federal Reserve (the Fed) is now in charge of protecting homebuyers from unfair and deceptive lending practices by lenders and loan brokers subject to the Real Estate Settlement Procedures Act (RESPA). This is a huge step forward since government decisions about mortgage lender conduct will no longer be subject to relaxation by massive political pressures. These new regulations, effective April 1, 2011, apply to RESPA mortgage loan brokers and loan officers and the lenders who pay them.
The Fed’s new regulations prohibit:
- compensation for RESPA mortgage loan originators (MLOs) based on interest rates or other terms of the mortgage, except the loan amount;
- compensation for RESPA MLOs and loan officers paid by the homebuyer when any amount of compensation is paid by the lender or a third party; and
- “steering” by RESPA MLOs and loan officers directing or channeling homebuyers into loan terms not in the homebuyer’s best interest when the sole economic function of the steering is to increase broker or officer compensation.
RESPA MLOs and lenders must hand the homebuyer information concerning all loan options, including:
- the lowest rate of interest the homebuyer qualifies for;
- the lowest points and origination fees; and
- the exclusion of risky loan features such as prepayment penalties, negative amortization or balloon payments in the first seven years.
first tuesday take: Congratulations to Congress, at last. Making the Fed the overseer of mortgage lending practices is a step in the right direction. This significant change assures a more stable future for homeownership and multiple listing service (MLS) activity since management by the Fed will place emphasis on inflation control and even-keeled employment (their mandate).
Fed control will also remove politics from lending, a major reason for the mortgage lender problem which has been building since the deregulation in 1980. Mortgage lender deregulation, which began in earnest both judicially and legislatively in 1982, is the primary reason for the Millennium Boom in real estate sales. Excessive and risky mortgage lending acted as a financial accelerator to triple prices of low-tier homes in California, only to see our real estate market suffer an economically devastating collapse.
The “no to everything” constituency believes any regulation of printed money stifles our economy. However, regulation over money — our medium of exchange printed exclusively by the Fed — is always needed to prevent money-driven societal travesties such as those associated with what the real estate market went through during the unleashed Millennium Boom and the current resulting crash. [For more information on lender regulations, see the May 2010 first tuesday article, The era reform: new regulations for bankers creating mortgage-backed securities.]
The next task for the Fed is to completely prohibit the exactions lenders impose on a buyer’s assumption of a mortgage with due-on-sale clauses in trust deeds, a lender practice first permitted in California by the 1982 deregulation.
Looking forward: when annual homes sales volume increases and the Fed raises short-term interest rates, buyers will seek to assume today’s 4% to 5.5% fixed-rate mortgage (FRM) loans. At that moment, lenders will interfere with MLS sales volume by demanding increased interest rates and assumption fee exactions as buyers seek to take over these advantageous loans from owners eager to sell.
This restraint on home sales will reduce the liquidity of home ownership, a homeowner’s job relocation mobility and property values, and increase loan delinquencies: just what the nation’s long-standing housing policy was designed to avoid.