High cost mortgage loans
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| Buzzards in Lending Tree |
Office of Consumer Financial Protection (Bureau) issued the “final
rule” to the Dodd-Frank Wall Street Reform and Consumer Protection Act's
amendments to the Truth in Lending Act and the Real Estate Settlement
Procedures Act with the intention that this would protect consumers from
getting bad loans. The final rule expanded the types of mortgage loans that are
subject to the protections of the Home Ownership and Equity Protections Act of
1994 (HOEPA). Consumers who want to move
ahead with a high cost mortgages receive information about homeownership
counseling providers.
Certain practices were banned with the intention to help
borrowers who 1. Didn’t read the disclosures they signed or 2. Couldn’t find a
better deal. The rules were supposed to help the individual consumer but in some circumstances the rule harms them. This is exampled in loans under $10000, loans with layered pricing adds and certain high loan to value HARP and HomePath products.
High cost mortgage rules limited the following situations:
-
Balloon payments were banned, unless they are for the
seasonal or irregular income of the borrower, or part of a short-term
bridge loan, or they are made by creditors meeting specified criteria,
including operating predominantly in rural or underserved areas.
- Creditors are prohibited from charging prepayment
penalties
- Late fees are restricted to 4% of the payment that is
past due, fees for providing payoff statements are restricted, and fees
for loan modification or payment deferral are banned.
- Creditors originating HELOCs are required to assess
consumers' ability to repay.
- (Creditors originating high-cost, closed-end credit
transactions are required to assess consumers' ability to repay under 2013
Ability-to-repay. Ability to repay by either tax returns, w-2 forms, or
bank deposits?
- Mortgage brokers are prohibited from recommending a consume
default on a loan to be refinanced by a high-cost mortgage.
- Before making a high-cost mortgage, creditors are
required to obtain confirmation from a federally certified or approved
homeownership counselor that the consumer has received counseling on the
advisability of the mortgage.
HIGH PRICED
MORTGAGE LOANS ARE NOT Saleable to the GSE’s so a lender who finds the spread exceeds 1.5 percent over the Average Prime Offer Rate must either reduce the costs or eat the loan.
If a current loan scenario is unsellable because it failed the federal HPML test, the lender is stuck. The APR
exceeds comparable Average Prime Offer Rate by 1.5% or more (or 2.5 for Super Jumbo).
Based on
the date the interest rate is set (locked or re-locked), lenders must compare
their APR with the Fed’s APOR index. The loan will be considered a
higher-priced mortgage loan if the APR exceeds the APOR index by:
–
1.5
or more percentage points on First Liens
–
2.5
or more percentage points on Jumbo First Liens
–
3.5
or more percentage points on Subordinate Liens
There are several things that may
cause a loan interest rate to go above the
APOR:
Lower loan amounts – the impact of fees
on the APR increases as the loan
amount decreases. A $100,000 loan
is more likely to trigger an HPML than
a $300,000 loan. Unfortunately
there are fixed costs that are the same for a $300000.
mortgage or a $80000. loan
Mortgage insurance on loans over
100% LTV – The loan may have MI over
a longer period of time because
the LTV is in excess of 100% (common in
HARP loans).
Shorter loan terms – APR fees are
averaged over the term of a loan, so the
shorter the term the higher the
fee (a 20 year loan will have a higher APR
than a 30 year loan).
Certain products such as HOME
PATH that has high loan to value and no mortgage insurance
Borrowers who apply for smaller
loans with layered risks will hav difficulty finding a lender. For example a borrower with lower FICO score wants to
purchase a condo in Laguna Woods as an investment. There are so many pricing
adds, that no rate can accommodate the request. Catch 22.