Wednesday, November 12, 2008
As we've learned, the mortgage crisis was fueled in part by people agreeing to mortgages that they ultimately could not afford. In some cases, people didn't understand or know that their mortgages could result in large payment increases after just two or three years. Others did not recognize the total costs that come with homeownership. And others paid higher loan origination and closing costs simply because they did not know about other affordable options.
I am pleased to announce new mortgage rules in this country that will help millions of American families seeking to buy, or to refinance, a home. Today we are unveiling new regulations under the Real Estate Settlement Procedures Act, or RESPA.
Let me tell you how this new rule will work. For the first time ever, HUD will require that mortgage brokers and mortgage lenders to provide consumers with a standardized description of terms called the Good Faith Estimate. The GFE will be given to borrowers at the time an estimate is provided and will more clearly answer key questions consumers have when applying for a mortgage:
- What's the term of the loan?
- Is the interest rate fixed or can it change?
- Is there a pre-payment penalty should the borrower choose to refinance at a later date?
- Is there a potentially crippling balloon payment?
- What are total closing costs?
In addition, HUD will require that the compensation lenders pay to mortgage brokers be more fully disclosed. These so-called "yield spread premiums" are rarely understood by, or fully disclosed to, borrowers. These premiums are directly tied to the higher interest rates that borrowers pay. Consumers deserve to understand this and they need to get credit for essentially paying these premiums.
HUD's new Good Faith Estimate will offer consumers more certainty about the loan they're agreeing to. And with a standardized GFE, consumers can shop more effectively for the lowest cost loan. We will also make changes to the HUD-1 settlement statement that consumers see at the closing table. Each designated line on the final HUD-1 will include a reference to the relevant line from the GFE. This will allow borrowers to easily compare their final loan terms and closing costs with those listed on their Good Faith Estimate.
Buying a home in America should be the fulfillment of a dream. Instead, millions of families go to the settlement table each year without clearly understanding what they are paying for. In many respects, it's clear that the current way people buy and refinance their homes isn't serving us very well at all and has contributed to the current housing crisis.
So, this new RESPA rule I am announcing today seeks to bring more clarity and certainty into the market. Through a simpler and better understanding of their costs, consumers can shop more effectively for a mortgage. Based on HUD's economic analysis, we estimate that improving upfront disclosures on the GFE and limiting the amount that estimated charges could change will save consumers nearly $700 in loan costs.
We went through an extensive public comment period, and as you can tell, we took the 12,000 comments we received very seriously. We have made some significant modifications from the proposed rule we issued last March. We expect the final rule will go on public display at the Federal Register on Friday. This new, final RESPA rule will take effect 60 days after publication. And the new standard GFE and revised HUD-1 will be required on January 1, 2010.
We very much hope these modifications will convince our industry partners and those in Congress that we have approached this rulemaking process in a thoughtful manner. This rule also brings more fairness into the process by balancing the needs of millions of American homebuyers with those legitimate concerns expressed by those in the business of homeownership. Later today, we will offer the media, those in Congress, and our industry partners a more detailed briefing of what I have just announced.
One year ago, President Bush stood in the Rose Garden and promised new mortgage rules as part of a comprehensive plan to address rising foreclosures. Now, the Administration is making good on that promise by moving forward with RESPA reform to help families avoid getting into trouble in the first place.
There has been a lot of discussion about the need for responsible regulation to control some of the excesses that led us to where we are today. RESPA reform is that responsible regulation.
Millions of Americans go to the closing table each year. Most have little idea what's expected of them. Our goal all along has been to allow consumers to do what consumers do best - to shop for the more appropriate loan to meet their family's needs. The rule I am announcing today does this.
I firmly believe this will be a big step forward for restoring trust and transparency between the industry and the homeowner. HUD's new Good Faith Estimate treats everyone fairly - real estate agents, brokers, lenders, title companies and other settlement service providers. But it also extends that fairness to the very people we must all focus on - the consumer.