Is a Simpler Mortgage Application Process On the Way?

Regardless of what type of loan you are interested in getting, the paperwork and process of getting a loan can be confusing. Sure, there are different types of loans (popular ones include VA loans, FHA loans, Conventional loans and jumbo loans) and the paperwork will be different for each type of loan – but that is not the only confusing part of the process. Each lender has different “overlays” which means getting an FHA loan from one lender may follow a slightly different process than getting a loan from a different lender.

To further complicate things, there are mortgage brokers, bankers and large banks — and each one has their own process to follow that can be confusing.

Lucky for consumers, the CFPB has been established to hopefully make the entire process simpler regardless of what type of loan you apply for.

The Consumer Financial Protection Bureau (CFPB), established following the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, was implemented specifically to create, implement and enforce laws that protect consumer interests as they pertain to financial dealings, including mortgage applications.

As a direct response to complaints from consumers that they did not receive ample information or assistance from their lenders, the Bureau recently unveiled plans to simplify the mortgage application process and to provide increased protection for consumers who are taking out high-cost mortgages. If implemented, these regulations will provide the transparency needed for consumers to avoid costly hidden fees and uncertainties during the home-buying process. The proposed regulations currently open for public comments, and the final version of the regulations should be finalized by early 2013.

What the New Regulations Entail

Until now, federal law has demanded that loan applicants receive two sets of similar forms, one required by the Real Estate Settlement Procedures Act (RESPA) and the second required by the Truth in Lending Act (TILA). Aptly dubbed “Know Before You Owe” mortgage forms, the CFPB’s proposal would continue to require two sets of forms, but the information contained within would be less repetitive, such that one form would focus entirely on stipulating the closing costs, while the other would describe the mortgage process as a whole, including the costs and risks, information which would hopefully reduce the risk of foreclosure or defaulting on the loan.

The new forms proposed by the CFPB have been reviewed by both consumers and mortgage professionals, and have received thousands of comments from the public. Ten rounds of testing have been done in order to fine-tune the documents to ensure that they address the issues as clearly and concisely as possible. The CFPB website current presents the proposed forms for public feedback which can be submitted until November 6, 2012.

In addition to changes in the paperwork required when applying for a mortgage, the CFPB has proposed that mortgage lenders adjust the paperwork presented to borrowers in the form of monthly statements, so that moving forward, each monthly mortgage statement would include a breakdown of the different aspects of the mortgage payment such as interest and principal, as well as information listing where borrowers can seek help if they are concerned about their ability to pay their mortgage.

In the same vein, the new regulations would also require lenders would to inform borrowers in advance of any upcoming interest rate hikes, and to provide suggestions as to where the borrower can receive assistance if he or she expects that the rate hike will make the monthly payments unaffordable.

If implemented, the CFPB will monitor lenders to ensure that they respond to all borrower inquiries within a defined time period, a measure aimed at preventing borrowers from entering foreclosure simply because they could not connect with their lender to find an alternate solution which may include refinancing, speaking with a HUD (US Department of Housing and Urban Development) counselor or filing for government assistance.

Finally, the CFPB is working to protect borrowers taking out high-cost mortgages by restricting fees for late payments or modifying the terms of the loan, and requiring loan counseling for all recipients of high-cost mortgages. Public comments about the new stipulations for high-cost borrowers can be submitted to the CFPB until September 7, 2012.

Whether or not the proposed CFPB regulations are actualized, it is critical for mortgage borrowers to understand their options as they pertain both to borrowing conditions and repayment options during an unexpected financial crisis. Those who are unsure about their options or who don’t feel comfortable making a final decision should be encouraged to seek additional advice or to review the material presented so that they can make a comfortable, informed decision before committing to a long term loan.

Mortgage Applications Strong But Slightly Down

The Mortgage Banking Association announced that mortgage applications dropped 7% week over week for the week ended June 22nd in their weekly survey, which covers more than 75% of all U.S. retail residential mortgage applications. Refinance itself had dropped 8% from the previous week, while purchase inquiries fell 1% from the week previous on a seasonally adjusted basis.

Mortgage rates are still extremely low, but the market overall saw a dip downward in a natural response to an influx of application volume last week from the new FHA streamline refinance mortgage insurance requirements – requirements that markedly lowered mortgage insurance for homeowners that had FHA-backed mortgages endorsed by the FHA before June 1st, 2009.

This new guideline allowed homeowners backed by the FHA before June 1st, 2009 to pay an upfront mortgage premium at close equal to only 0.01 percent of the loan size (otherwise known as 1 basis point). This would mean only a $10 upfront mortgage premium (MIP) to be paid by the homeowner at closing.

Compare this to refinancing for FHA-backed loans endorsed on or after June 1st, 2009, where mortgage premium at close is 175 basis points, or 1.75% of the loan size. For a loan of $100,000, the homeowner with an FHA mortgage before June 2009 would pay only $10 for their mortgage insurance premiums, while the homeowner with the FHA mortgage afterwards would pay $1750!

New FHA Streamline Guidelines Cause a Mortgage Application Roller Coaster

It’s no surprise, then, that the announcement of these new FHA Streamline Refinance market created a large mortgage application influx in the market when it came into effect on June 11th, 2012.

“Refinance volume fell last week due largely to a fall-off in refinance applications for government loans, which had more than doubled the prior week. The large swings in activity were due to the implementation of FHA’s new premiums on streamline refinances, and borrowers timing their applications to lower their premiums.”

Michael Fratantoni, MBA’s Vice President of Research and Economics

This reality can be seen in the data, as the proportion of refinance mortgage applications, previously at 80% of total, dropped to 79% week over week. Overall mortgage rates were pretty much static for the week, which didn’t help refinance or purchase rates improve in volume.

On the purchase side, the volume drop of 1.4% reflects that the real estate market is not yet booming back, as the purchase volume is a leading indicator of home sales nationally. The original expectations by the MBA for the purchase market to rebound starting at the end of 2012 and into the 2013 have since been changed to less optimistic tones, as the future state of the purchase market still seems in flux.

Making a Decision on Your Mortgage

Given what you know about the mortgage market, the takeaways from the recent fluctuations for your loan should be fairly clear. If you have a FHA mortgage loan backed before June 1st, 2009, enjoy the lower closing costs you will now face. If you aren’t so lucky, the market is overall well-conditioned for a refinance of your loan if you haven’t already been taking advantage of the low mortgage rates.

On the purchase side, things are still unknown. Looking at a new home from a real estate investment is still possible, but the risk condition is still there with no clear, immediate signs of recovery. Do your research and act accordingly for the best future health of your mortgage.