D.C. aims to change mortgage shopping

CHICAGO — Few borrowers read every line of the avalanche of paperwork that comes with a mortgage, and even the most well-intentioned consumer might have difficulty understanding all costs associated with the loan and how it compares with what other lenders are offering.

Now, lawmakers are trying to make the mortgage process easier to understand and fairer overall through regulations that could come to fruition via the proposed Consumer Financial Protection Agency.

If the reforms materialize, "the days of fine print, amorphous language and an avalanche of papers ... will come to an end," said John Taylor, president and chief executive officer of the National Community Reinvestment Coalition, an association of community-based institutions that promotes access to banking services to create affordable housing and job development. "Transparency is the name of the game."

After the Obama administration outlined the concepts late last month, Shaun Donovan, secretary of the Department of Housing and Urban Development, further discussed goals of the reforms.

According to Donovan, they include:

• Requiring transparency. Consumers would receive a simple, integrated federal mortgage disclosure that is "reasonable, clearly written and concise," and be adequately presented with the risks and benefits of a mortgage product.

• Promoting simplicity. Borrowers would first be offered "plain vanilla" mortgages with terms that are straightforward. They can obtain more complex mortgages, but the vanilla loans would be presented as a first choice.

• Demanding fairness. Mortgage brokers would be required to determine whether the mortgage they're selling to a borrower is affordable, and prepayment penalties would be banned or restricted.

Hidden fees that compensate a broker for selling a higher-cost loan would be banned.

Loan originators and the sponsors of securitizations could be required to retain 5 percent of the credit risk of a mortgage, requiring them to have "skin in the game," or a stake in the outcome of the loan originated, Donovan said.

That point as well as the rest of the reforms could possibly cost consumers more for their mortgages, perhaps adding as much as a half a percentage point to their mortgage rates, said Cameron Findlay, chief economist for LendingTree.com. Lenders who can't afford to make the procedural changes might be forced out of business, which could effectively decrease competition, he added.

"It's going to create a situation where banks and brokers alike are going to make sure that their costs are covered for any adjustment to their process," Findlay said.

But, he said, any extra costs would be worthwhile to restore faith in the system and protection for consumers.

"How can it possibly cost consumers more than what it has already cost this nation?" Taylor said.

Even if lenders ultimately are forced to write fewer loans as a result of new regulation, the consumer protections are still worthwhile, said John Sullivan, president of the National Association of Exclusive Buyer Agents.

"I would rather people have more difficulty getting the loan than getting a loan they can't afford to pay in three years," he said.

At their heart, the reforms intend to force clear disclosure in the mortgage market so that consumers can compare mortgage products on an apples-to-apples basis, with easily discernible costs so that lender-to-lender comparisons are simpler. The goal is for people to always pick a mortgage based on what is offered, not how it is worded or what is presented, just as they would buy any consumer good — based on the product inside and not the packaging in which it's wrapped, Taylor said.