Mortgage Products On The Chopping Block In Washington

May 26th, 2010

While many cheer the financial reform legislation working its way through Washington due to the restraints it will put on Wall Street, lost in the reporting are the impacts on the mortgage industry and homeowners. If passed in its current form the reform bill will eliminate mortgage products preferred by most homeowners refinancing their homes. At a time when data shows a housing recovery is slowly underway across the country, the reforms in the current legislation could stall any recovery.

No Point Mortgage Refinances

One of the most common comparisons home owners undertake using a loan comparison calculator is to see the difference between a mortgage refinance with points and without points. Is it worth it to add one point to your loan amount for a lower mortgage rate? Or does your family benefit more from a slightly higher mortgage rate with no points? The current financial reform bill being negotiated between members of the House of Representatives and Senate would eliminate no point mortgage options for homeowners. Feeling that only unscrupulous mortgage originators used no point mortgages to get homeowners to take higher mortgage rates so they could reap higher profits, members of Congress want to eliminate this critical mortgage tool that helps hundreds of thousands of homeowners.

In the current housing recovery with considerable focus on keeping homeowners in their homes, one of the most beneficial tools has been the use of the FHA Streamline Refinance which allows homeowners to refinance at no cost to a lower mortgage rate without having to get an appraisal. Under the current bill the FHA Streamline Refinance will no longer be available to homeowners.

Fannie Mae and Freddie Mac, the mortgage giants who underwrite the overwhelming majority of U.S. mortgages, as part of their efforts to support home ownership joined together for Making Home Affordable refinance products. These mortgage products allow homeowners who have mortgages held by Fannie Mae or Freddie Mac to refinance up to 125% of their current property values. Most of these refinance mortgages are accomplished using no point financing to ensure the new mortgage amount fits within the loan to value limits. Again, the new financial reform bill would require all the refinance mortgages under Making Home Affordable transactions to include origination fees and points.

Compare loan calculators, instead of your inputting numbers for calculating no point and one point options, some may have you comparing one point and two point mortgage options and mortgage rates.

Interest Only and Adjustable Rate Mortgages Impacted

Other mortgage products on the chopping block in the financial reform bill are those with interest only payment options. A majority of the members of Congress feel interest only mortgage products were a primary cause of the housing market collapse beginning in 2008. As a result they wish to eliminate these useful mortgage products that have benefited many financially astute homeowners who have used interest only mortgages to manage their home finances and investments. While the interest only mortgage options have been misused by some homeowners and improperly sold by many mortgage originators, in the right circumstances the interest only mortgage products are very useful and beneficial. If the reform bill passes in its current form this mortgage option will be eliminated as a choice for homeowners.

In its effort to “fix” the mortgage industry and housing markets that are already recovering and prevent any future market bubbles from occurring Congress has also set its sights on Adjustable Rate Mortgages (ARMs) by writing legislation that will change the way mortgage applicants are qualified for these products. Many Americans choose some form of an adjustable rate mortgage having used an amortization calculator showing how much they can pay down on their principal balance with the lower initial ARM rates. The new legislation will require all ARM products, even 3/1 and 5/1 hybrid ARMs, to use the maximum possible interest rate to qualify the borrowers. This calculation for qualification will effectively eliminate ARM mortgage products since most applicants will be unable to qualify, and if they do qualify would most likely be purchasing a higher priced home with a higher mortgage available through a 30 year fixed rate mortgage and lower qualifying rate.

While “lobbyists” has become a bad word in America, they do serve a purpose in our legislative process. As members of the House and Senate meet in conference to negotiate the differences in the reform bills passed by both bodies to present one bill to the President for signature into law, lobbyists will be educating and informing members of the the House, Senate and conference committee as to the impact on American homeowners if the legislation is passed in its current form. But the best lobbyists in our nation are the American voters and homeowners who write, email or call their elected representatives. Using the mortgage calculators on this site you can determine the impact of the pending legislation on your refinance mortgage or future home purchase mortgage options.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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