New Mortgage Rule Could Hurt Homebuyers

real estate Fannie Mae and Freddie Mac, the two government-sponsored mortgage enterprises, will stop providing money for the following types of loans, beginning January 10, 2014:

1) 40-year mortgages

2) Interest-only payment mortgages

3) Pick-a-Payment” negative amortization loans

4) Any loan with more than 3% in fees and points (total)

I’ll be the first to say, “Good riddance!” to the first three, but let’s look at limiting fees and points to 3%, no exceptions.

Previously, the law limited total fees and points at 7% –unless the borrower signed a waiver form three days before signing the loan documents. That little loophole–the waiver form–enabled lenders to reap a high profit on small loans. Now the pendulum is swinging in the opposite direction.

In states where home prices are high, most loans don’t have an excess of 3% in points and fees anyway, so the new law won’t make a difference.

On a $400,000 loan, 3% = $12,000. That is more than they need to make. (Although some disagree and do charge that much.)

But in states where you can get a decent house for only $50,000, this fee cap could cause a major problem. If total fees cannot exceed $1,500 and the title company charges half that, then $750 does not leave enough profit for the lender to pay the loan officer, loan processor, underwriter, doc draw person, and funder–let alone pay the rent, utilities and management.

Will this cause mortgage lenders put a lower limit on the loan size they’re willing to accept? Already, some limit their loan size to $100,000 or similar. What will happen when the new law cuts down profitability even more?

Homebuyers who want to purchase real estate in the low price range might find themselves hard pressed to locate a lender. They would then have to search for a lender that does not use Fannie Mae or Freddie Mac money. In other words, search for the two or three out of a hundred that have other sources for funds.

On the other hand, this could present an opportunity for more investors to provide private money for small real estate transactions. Private lenders are not subject to rules imposed by the FHFA committee.

New Law Coming for Adjustable Rate Loans

Adjustable rate  Are you nervous or confused about what’s going to happen with your adjustable rate mortgage (ARM)? The Consumer Financial Protection Bureau set nine new laws in place this month. One of these laws is designed to help home owners who have an ARM so that they aren’t shocked when their rate goes up.

In the past, too many borrowers didn’t understand their loans and were taken by surprise when their monthly payments increased. They discovered they could no longer afford to live in their homes, and we all know what happened after that. The CFPB aims to prevent another mass foreclosure disaster.

The new law states that lenders must send you a notice between 210 and 240 days before your first interest rate adjustment. This notice should give you an estimate of what your new rate and payment will be.

In addition, the lender must send you a notice between 60 and 120 days before a payment change. This is different than the above, because if the interest rate hasn’t changed, your payment will not change. Or, if the interest rate changed slightly but your loan balance is lower, your payment might not change. With an ARM, your new payment is calculated using the interest rate and your current balance. This is why people with an ARM can see their payment go down as their balance gets paid off.

Currently, the law states lenders have to provide you when an annual notice that posts the new interest rate, but not the payment. If you want to know how your new payment in advance of receiving the bill, you have to go hunting for an amortization calculator–not very convenient.

I am pleased with this new law. But because there is a compliance period after a new law being enacted, lenders have until February 2014 to comply. Let’s hope most of them jump on board sooner.

In future posts, I will discuss additional new laws. Feel free to subscribe. I make posts on Mondays and occasionally on another day as well.