In February, Mick Mulvaney, acting director of the Consumer Financial Protection Bureau, released his strategic plan for the agency, including the loosening of regulations with the goal of making it easier for Americans to borrow money, including mortgages for home purchases.
Critics of the plan immediately recalled stories from before CFPB’s founding in 2011, when subprime mortgages that couldn’t be paid back led to mass foreclosures and a housing crisis that lasted years during the Great Recession.
As of yet, it’s unclear if deregulation will lead to sweeping changes to how people — and how many people — can purchase property with a mortgage, or if it could trigger large-scale predatory lending again.
In times of fierce competition, those in any industry — including mortgage lending — can neglect their overall mission and place immediate profit over long-term success. Sanjiv Das, CEO of nonbank lender Caliber Home Loans, explains: “Lenders lose sight of their responsibilities to make sure they give the right credit to the right consumer.”
Hopefully lenders will be able to maintain a measure of self-regulation, as mass foreclosures and the plummet of home values nationwide did not serve them or homeowners well during the housing crisis a decade ago.
Regardless of what the future holds for regulation, the only way a borrower can ensure he or she is not being taken advantage of is to know exactly what a mortgage product includes and how it could change. Here are four things to help you tell when a mortgage isn’t the right fit for you.
Expect Lender Competition
With more buyers than homes, the housing market has been tough for buyers over the last few years, but it’s not often discussed how a tighter market with rising prices also puts pressure on the lending industry.
“Because there isn’t enough supply of homes, a large number of customers are choosing a few homes,” Das explains. “And so home prices are going up, and as they are going up and as interest rates are going up, lenders’ [profit] margins are coming down. As lenders margins are coming down, they are competing against each other to make sure that one gets the customer as opposed to the other.”
Having more than one mortgage lender competing for your business may feel flattering, but you need to keep in mind that the mortgage with the lowest interest rate or required down payment isn’t necessarily the best — you have to look at all the fine details. Take into account the length of the mortgage, whether the interest rate will remain the same and for how long.
Look at the Lender’s Business
With any lender, research how much of the company’s business comes from home purchase loans, as opposed to other personal or business loans or refinance mortgages. Many banks include total dollar amounts in mortgage originations or other loan types in their quarterly earnings reports, or you can ask the loan officer you’re speaking with for information on the breakdown of loan types the company does. A company focused on a separate form of lending, like refinancing, may not be the best option for a mortgage to initially purchase your home because it doesn’t specialize in purchase products.
A lender’s focus on the refinance market may also be a sign that you’ll be pressured to refinance sooner than necessary, more often than you should or for a rate or term that doesn’t benefit you. At least, that’s the case for a few lenders recently restricted by government-backed mortgage agency Ginnie Mae for practices with refinancing on Veterans Affairs loans, including NewDay USA and Nations Lending Corp.
Ginnie Mae has reported that unnecessary refinances targeting veterans have increased in recent years. Todd Jones, president of BBMC Mortgage, a division of Bridgeview Bank Group, says some of the lenders Ginnie Mae references have been particularly attracted to the Interest Rate Reduction Refinance Loan, a program backed by the VA aimed at making it easier for veterans to refinance with little paperwork.
“It was set up to be with very few restrictions, because why would we want to restrict a veteran from being able to easily take advantage of a lower interest rate?” Jones explains. “Certain lenders, though, made that the backbone of their business.”
In this type of practice, lenders will contact borrowers, for example, to offer refinancing within months of purchasing a house and with minor decreases in the interest rate, Jones says. The homeowner’s monthly payments don’t decrease by much — and even increase, in some cases — for maybe one year off the loan overall, which is inconsequential because most people will move and sell their house before then. While Congress considers legislation that would change how predatory lending is prohibited for veteran and civilian borrowers alike, a full understanding of the mortgage you sign up for is your best defense.
You Don’t Have to Fear the ARM
The vast majority of today’s mortgages are 30-year, fixed-rate mortgages. With interest rates having been near historic lows for the past couple years, the fixed-rate mortgage has made sense because rates can only go up. Because of the length of the term, the interest rate is typically slightly higher than an adjustable-rate mortgage by roughly 0.5 percent or less, which can change after a defined period of years.
ARMs developed a bad reputation during the housing crisis, as subprime loans issued technically qualified as adjustable-rate mortgages. But Mark Fleming, chief economist for title insurance company First American, points out that it’s not traditional adjustable-rate mortgages that were the nature of predatory subprime loans, but the conditions that were added on.
“Where we got ourselves into trouble, collectively as an industry and as consumers, I think, was when an adjustable-rate mortgage meant more than simply not being fixed-rate, but actually meant things like negative amortization, teaser rates only for the first year, interest-only payments,” Fleming says. “All of these features that don’t actually have anything to do with an adjustable-rate mortgage, but were added onto an adjustable-rate mortgage, and so ARM became synonymous with these complex mortgage loans that had the potential for significant payment shock.”
That payment shock — where a significant month-to-month increase in payments makes it unaffordable for the borrower — is what led to so many foreclosures during the housing crisis. Payment shock is also what scares most borrowers away from opting for an ARM.
Under an ARM that doesn’t have all the smoke and mirrors that would make it subprime, the interest rate increase wouldn’t take place for a set number of years and would adjust incrementally to avoid payment shock. In the current market, Fleming says ARM defect rates are in fact lower than those of fixed-rate mortgages, though that’s not typical.
Don’t Understand? Find a Third Party Who Does
Long before the housing crisis, mortgages gained a reputation for being complicated. Sure, the agreement is lengthy, includes jargon like “amortization” (which means paying down the loan) and may require some math to know how monthly payments will affect your net income.
But ultimately, you should understand what you’re signing. If there is a percent that doesn’t seem familiar or a time period listed that causes you to have trouble calculating what your future payments will be, find someone who can sit down and walk you through the details.
For the sake of impartiality, find a housing counselor, accountant or independent loan officer who can help you map out your payments — not just for the next year or two, but throughout the length of time you expect to be in that house.
It’s OK to be realistic for that time period, too. You don’t have to opt for a lengthy fixed-rate mortgage because it’s the simplest choice. “If you’re a first-time homebuyer, what is the likelihood that you’re going to live in that house for the next 30 years?” Fleming points out.
Jones recommends looking at any possible mortgage from a net tangible benefit standpoint: “Make sure either you’re buying the home you want with the pricing that you want, or you are saving a significant amount of money, sufficient enough to make up for any closing costs that are included in the transaction.”
If you’re purchasing with the intent to live in your home for the next 30 years, that’s great. But Jones points out that the average loan will be on the books for just six or seven years, because people either move or refinance. As a result, you want to see yourself break even on those closing costs before selling the property. Jones says breaking even on your closing costs after one or two years is ideal to consider it a transaction that will benefit you.
It’s impossible to guarantee that your income will increase by a certain amount in a few years, and there’s also no guarantee that another recession won’t lead to layoffs. But by getting a mortgage that you fully understand and know you can repay, you are less likely to lose your home to a loan that wasn’t made for you.
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How to Spot a Mortgage That’ll Set You Up for Failure originally appeared on usnews.com