Mortgage Industry Changes From The Recession
Wednesday, November 11th, 2009The mortgage industry has undergone regulatory reform. The recession took a heavy toll on the creative lending practices. Subprime lending and exotic subprime mortgage products are a thing of the past. Here are some of the reforms that have been implemented by the Mortgage Reform Act of 2009 and subsequent legislation.
· More documentation – The low documentation loans and no documentation loans that characterized the subprime lending practices are no longer permissible. Today’s mortgage applications require more paperwork than ever before. Lenders must substantiate and verify all income and debt. Borrowers should expect to provide lenders with pay stubs, bank statements, retirement account information, income tax returns and brokerage accounts and debt statements.
· Refinancing delays – The banking industry, like many recession industries, has undergone massive layoffs. Requests for refinancing can now take up to 60 days to process.
· New appraisal practices – The new Home Valuation Code of Conduct has overhauled the appraisal profession. The new code discourages contact between real estate sales people and appraisers. Only lenders can work directly with appraisers and even that practice is diminishing. Most appraisers are retained through the use of an independent third party. These changes have led to some confusion but Realtors have asked Congress to suspend the new rules.
· Credit evaluation – In the past a Fair Isaac Company (FICO) score of 740 would entitle the borrower to lower interest rates. The new favored credit standard is 760. If your credit score is 760, you may want to consider refinancing.
· More Truth in Lending – As of July 2009, lenders must disclose earlier in the application process how much a loan will actually cost. The purpose of this early disclosure is to allow the prospective borrower more time to consider the mortgage offer. After the borrower receives the new disclosure, the borrower has even days to confirm the selection.
· Longer Closing Dates – It now takes more time to close mortgages. Part of delay is caused by the extended decision time and part of the delay is caused by the simple fact that foreclosure departments are busier than lending departments.
The most aggressive mortgage lender is now the FHA. More than 60% of mortgages issued by the FHA in 2009 have been issued to first time homebuyers. The Federal Housing Administration has lowered their down payment requirement to 3.5% and has increased the acceptable debt to income ratios.
