Loan officers weigh in on proposed mortgage document changes - East Valley Tribune: Business

Loan officers weigh in on proposed mortgage document changes

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Posted: Saturday, March 29, 2008 3:07 am | Updated: 11:33 pm, Fri Oct 7, 2011.

For Valley loan officers like Kathy Rhubottom, an influx of calls from desperate borrowers stuck in dicey adjustable-rate mortgages has become a daily occurrence.

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Industry experts say the problem stems, in part, from people not understanding mountains of complex loan documents full of percentages, indexes and industryjargon. But after months of investing time and energy into finding a house, many borrowers feel pressured to sign what's put in front of them at the closing table - whether or not they fully understand every line.

People simply didn't know what they were getting into, Rhubottom said of the troubled homeowners who have called her for help.

And with home values now far below what many families owe their lenders, "95 percent of those people couldn't refinance out," she said.

The U.S. Department of Housing and Urban Development is hoping to stave off future mortgage woes by making loan disclosure documents easier to read. Earlier this month, the department proposed a series of reforms to the Real Estate Settlement Procedures Act, or RESPA.

The changes would include a standard Good Faith Estimate form that would clearly state:

the interest rate and monthly payment;

whether the interest rate and principal balance can increase and by how much; and

whether a loan has a prepayment penalty or balloon payment.

"Buying a home can be very intimidating," HUD Secretary Alphonso Jackson said in a statement. "Consumers have had no assurance that the loan terms and closing costs they are offered will reflect what they confront at the settlement table."

The proposed form would also include consolidated closing costs and the total estimated settlement, so people can easily compare loan offers from various lenders, according to HUD.

Local loan officers, however, wonder how effective the proposed rules would be.

Lenders are already required to give potential borrowers Good Faith Estimates, Rhubottom said. She added, however, that stating on the form if a loan has a prepayment penalty or if it is negatively amortizing would be two important additions.

Often overlooked by borrowers, prepayment penalties are fees charged for paying all or a portion of a mortgage off within a set time period.

Another huge problem has been payment option adjustable-rate mortgages, said Taum Hemmingsen, owner of Marketline Mortgage.

These loan products typically offer four payment options, the minimum of which isn't enough to cover monthly interest. The result: The borrower owes more at the end of each month than at the beginning, known as negative amortization.

Hemmingsen said he believes the proposed new rules are better than nothing but that consumer education is far more crucial, since many people don't read the documents handed to them.

One solution may be to require pre-counseling for nonstandard loans, he said. The borrower could go through a short Web course detailing the product they're interested in, he said.

"At least it puts some more of the ownership back in the client's lap to understand it," he said. "It's too easy to claim that you didn't know."

The changes would also require that lenders disclose payments to mortgage brokers, known as yield spread premiums.

For reputable lenders who already offer honest rates, the changes won't have much of an impact, said Jeff Underwood with AmeriFirst Financial in Mesa.

"It would weed out more of the loan officers who are gouging clients, that are charging rates just because they can make more money on them," Underwood said.

Disclosures are important, he added, but choosing a trusted loan officer is key.

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