5 ways financial reform affects you

5 ways financial reform affects you


Recent changes may make it safer to get a mortgage – and potentially, much harder, too. As rule making continues to play out, here’s what homebuyers should know.

By Luke Mullins of U.S. News & World Report

Although the financial-reform legislation won’t upend the conventions of buying or selling a home, it will precipitate key changes in the mortgage market. Even after all of the new rules are implemented, most consumers will still encounter the same figures — real-estate agents, mortgage brokers, home inspectors — who have long defined the homebuying process.

But the legislation, which President Barack Obama signed into law July 21, includes some specific provisions that, while perhaps less visible to house-hunters, will have a profound effect on the type of mortgage that buyers end up with.

“The interface with a broker or a lender won’t change,” says John Taylor, president and CEO of the National Community Reinvestment Coalition. “It’s just what the broker and lender is offering will be screened to protect the consumer from getting bad loans.”

Here is a look at the main real-estate-related provisions of the financial-reform legislation and what they mean for you:

1. Repayment evaluation. The massive home-price swings in recent years were linked in large part to consumers’ ability to obtain mortgages they often couldn’t afford. The legislation addresses this issue by forcing lenders to ensure that mortgage applicants have the financial wherewithal to repay a loan before lenders grant it. Taylor calls this provision a “critical” step in the creation of a safe mortgage market.

“Had that standard been in place [in the years before the housing boom], we would have avoided in great part the foreclosure crisis,” he says.

2. Incentive structure. During the run-up to the housing bust, brokers in some cases received increased fees for putting borrowers into risky, subprime mortgages — which often carried higher interest rates — says Julia Gordon, senior policy counsel for the Center for Responsible Lending. The reform legislation bans financial incentives based on a loan’s interest rate, as of April 1, 2011.

“You can’t make more [money] if you somehow talk [the borrower] into a higher-rate loan,” says Gordon, who adds that the law “takes aim at some of the underlying bad incentive structures that created the problem.”

3. Risk retention. A key shortcoming of the mortgage market’s “originate and distribute” model was that brokers passed off a loan’s risks when it was sold on the secondary market. As a result, mortgage originators and lenders had less incentive to ensure that the loans they sold were of sufficient quality.

The new law, however, requires firms selling mortgage-backed securities to hold on to at least 5% of the credit risk for all but the safest home loans. By compelling these companies to bear a portion of the risk themselves, the provision is designed to ensure that mortgages are underwritten more soundly.