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Impact of Financial Reform Beneficial for Mortgage Refinancing
Congress has been hard at work on the creation of the Consumer Financial Protection Bureau, the goal of which is to be a watchdog over all types of consumer lending transactions. While chances are good that you have read something about this recent legislation, you may still have questions about how these changes will impact your existing home mortgage and the process of mortgage refinancing in the future. This sweeping reform deals a number of changes to various entities who are involved with mortgage lending.
One of the primary effects of the Consumer Financial Protection legislation concerns property appraisals. New regulations require higher quality appraisal reports with more documentation than currently required on appraisals, which may make it harder to gain loan approval for both home purchase loans and mortgage refinancing transactions. Appraisers will be held to higher standards and will be insulated from pressure from lenders to artificially inflate home valuations in order to close mortgage loan transactions.
Another effect of the new legislation concerns loans that formerly required no official documentation. These "no doc" mortgage loans were often misused to qualify homeowners for home purchase mortgages or mortgage refinancing that the homeowners couldn't really afford, which helped to fuel the recent foreclosure debacle. While these "no doc" loans won't be completely outlawed, new regulations will make this type of loan expensive enough that few lenders or borrowers will pursue them.
Mortgages with prepayment penalties will also be impacted by the Consumer Financial Protection regulation. New legislation will severely limit the penalties charged by lenders for borrowers who prepay their mortgage payments, so borrowers will find that mortgage refinancing may be a less expensive transaction. This clause should also help to prevent future foreclosures, since borrowers trying to refinance out of an escalating adjustable rate mortgage will have an easier time switching to a less-expensive mortgage.
The way that mortgage lenders are compensated is due to change with the new legislation. In the past, mortgage brokers earned their commissions on the basis of the terms and the interest rates associated with the mortgage loan. In the future, commissions will be tied to the amount of each mortgage loan and on the overall volume of mortgage loans that are closed by the mortgage broker. The intent of this change is to reduce the occurrence of mortgage brokers steering their clients into home purchase mortgages or mortgage refinancing transactions that may not be in the borrowers' best interests.
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