What Wall Street reform means for your mortgage

By Tami Luhby, senior writer


NEW YORK (CNNMoney.com) -- Predatory lending would likely become a thing of the past if proposed regulatory reform rules are put into practice. And that may mean that mortgages get more expensive and more difficult to get, lenders warn.

The new rules, which Congress is expected to vote on this week, require that financial institutions ensure that borrowers can afford to repay the mortgages they are sold. Lenders would also have to tell borrowers the most they might pay on an adjustable rate mortgage and explain that payments will vary when the interest rate changes.

"These rules should help make sure people aren't put into mortgages they can't afford," said Julia Gordon, senior policy council for the Center for Responsible Lending.

Additionally, the comprehensive reform package would also ban banks from offering incentives to steer borrowers into costlier loans when they could qualify for cheaper ones, a controversial practice that fueled the subprime lending boom.

And it would prohibit prepayment penalties for adjustable rate, subprime and other risky loans and limits them to three years for traditional loans. This would help prevent borrowers from being locked into expensive loans.

More work to get a mortgage

While bankers and consumer advocates differ on the bill's impact on mortgage availability and cost, one thing is for certain: It would take more work to get a home loan.

While the bill doesn't specify downpayment size or creditworthiness, consumers would likely need some savings and a good credit score if they want to land a loan. This shouldn't be seen as a tightening of credit but as a return to prudent lending standards that existed before the recent housing bubble, experts said.

Gone would be the days of no-doc or stated income loans. Mimicking the current lending environment, borrowers would have to fully document their income with pay stubs, tax returns and the like.

This isn't to say that the self-employed or small business owners wouldn't be able to get home loans anymore. They'd just have to provide documentation that they can afford the mortgage.

"It's a little more work for the consumer but when they take out mortgage debt, there's a much higher degree of certainty that it's not disadvantageous to them," said Barry Zigas, director of housing policy for the Consumer Federation of America.

Other exotic loans, such as option adjustable rate mortgages, which allow borrowers to pay what they like but greatly inflates the principal balance, would be harder to come by. Lenders would be likely to stick with the more conservative fixed-rate or certain adjustable-rate loans.

Borrowers, however, would still have to be on their guard and thoroughly read through their paperwork and make sure they understand the terms of the loan, experts said.

Of course, many lenders are already putting these practices into place in the wake of the mortgage meltdown. But these rules are meant to codify them once the housing market picks up again.

"They are just basic, common sense rules of business and of fairness," Gordon said.

Standards: To be determined

If the bill passes, it may be another 18 to 24 months before lenders and consumers fully realize its impact. It will likely take the mortgage industry's proposed regulator, the Consumer Financial Protection Bureau, nine months to come up with the new rules and then more time for the industry to institute them, said John Courson, chief executive officer of the Mortgage Bankers Association.

The regulator also could decide to set standards on downpayment size, credit scores and total debt-to-income levels, Courson said. That would have a big impact on consumers.

Financial institutions warn that increased regulation -- and potentially greater legal liability -- could make it harder and more expensive to obtain a loan.

"The concern is there will be less choice for borrowers," Courson said. To top of page

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