A new mortgage proposal is now floating around Washington, one which intends to make the lending process clearer and less confusing – but not for VA loan borrowers.
The idea comes from the Consumer Financial Protection Bureau and the intent is pretty good: mortgage borrowers should have a solid understanding of their loans and to do that lenders should make appraisals automatically available without cost at least three days before closing.
This is a small change from the current rule which says borrowers can get a free copy of their appraisals – but only if they specifically ask.
“Under the proposed rule,” according to a CUNA Regulatory Advocacy Report, “a creditor could not make a higher-risk mortgage loan unless it obtains a written appraisal based on a physical inspection of the property’s interior by a qualified appraiser. The creditor would also have to provide the consumer with a free copy of the appraisal at least three days before closing on the mortgage.”
Traditionally it’s been very difficult for borrowers to get credit reports, credit scores, and appraisals when going through the lending process, however over time the rules have changed. For example, anyone can now get a free copy of their credit report once every 12 months from each of the three major credit reporting agencies. Also, under Wall Street reform, lenders are required to provide copies of credit scores for mortgage borrowers in certain situations. The result of the new law is that virtually all lenders automatically provide credit scores to everyone as a matter of course.
The same gradual process which has made credit information openly available is now beginning to be seen with appraisals. The CFPB proposal is to open up appraisal information for “higher-risk” borrowers and that’s both good and bad.
The good part is that everyone should see their appraisals to be satisfied that what they are buying or refinancing is properly priced. This does not mean that the sale price and the appraised value will always be the same but if they are wildly different then borrowers will certainly want a second look.
The bad part of the proposal is that it’s restricted to “higher-risk” mortgage applicants. The term “higher-risk” has a very specific meaning under Wall Street reform. Basically, “higher risk” loans are those with Interest rates and fees (or both) that are well above the prices paid by typical borrowers.
In addition, three days is not enough time for the borrower to seek a replacement loan or get out of a sale agreement which lacks an appropriate addendum. With the last mortgage I refinanced I received the credit report just after it was received by the lender.
The CFPB said its proposed rule will not cover reverse mortgage loans, mobile home financing, home equity lines of credit or “qualified mortgages.”
In broad terms, VA loans for veterans, FHA mortgages and conventional loans are all examples of “qualified mortgages.” This is a very important term under Wall Street reform because it means the mortgage has been made with a fully-documented loan application and the lender charged no more than 3 percent of the loan amount for points and fees. If you’re borrower the government is saying that you very much want a qualified mortgage because they are the safest loans available.
While the Bureau’s idea of making appraisals available to higher–risk borrowers is certainly appropriate, the concept should be expanded to all borrowers, not just those who understand the system and know to ask for an appraisal. After all, part of the lending decision is based on the appraisal value of the property or the sale price, whichever is lower.
My suspicion is that what the Bureau is proposing will either be widened to include all mortgage borrowers or that lenders will simply begin to provide appraisal reports automatically. Why? Because it’s easier to give out reports to everyone then to process individual requests.
Photo courtesy OlgerFallasPainting