Proposed Mortgage Reforms Handed Down By Hud

The U.S. Housing and Urban Development (HUD) Secretary Alphonso Jackson came up with a mortgage reform, which will clear up the confusion surrounding home buying by helping consumers understand the terms of their loans. This is a welcome and necessary change, considering the recent rise nationwide in loan defaults and foreclosures.

Proposed Mortgage Reforms By HUD

HUD’s proposal changes the rules of the Real Estate Settlement Procedures Act (RESPA), while improving the disclosure of loan terms and closing costs. This means consumers will be able to understand better the details of the loan and search for ones with lower costs. Their analysis is that offering consumers a more absolute cost estimate means borrowers can save nearly $700.

The end goal is to have consumers understand the home buying process fully, since HUD considers many of the current mortgage problems to be from a lack of knowledge of what is involved in taking out a loan. This will control fee inflation while giving the consumer the tools they need to make an educated decision regarding loans.

HUD's Proposed Mortgage Reforms -- The Good Faith Estimate Plan

The heart of HUD’s reform is a standard Good Faith Estimate (GFE) plan, wherein mortgage lenders and brokers will considerably enhance the understanding and disclosure all the significant parts of a loan. This entails telling the consumer about the interest rate, the monthly payments, whether the interest rate and principal balance can increase and if the loan has a prepayment penalty.

Some of the other highlights of the reform involve consolidating costs to put a stop to “junk fees,” plus showing the total estimated settlement charges on the first page. This way, consumers can easily recognize it and compare it with other loan offers. The new rules also indicate charges they can or cannot change during the settlement.

On top of this, the GFE requires disclosing lender payments to mortgage brokers. HUD feels that these payments should be disclosed because they depend on the interest rates agreed to by consumers. Lastly, settlement agents will need to read a “closing script” to borrowers that provide details of the loan and compare the estimated charges against the actual charges.

Accountability That HUD Mortgage Reforms Work

To make sure that these proposals will not form preconceived ideas against lenders and brokers, HUD has done some thorough consumer testing. They found out that the GFE helped people figure out the lowest cost loan over 90 percent of the time, whether or not the loan came from a lender or broker.

HUD also found that borrowers appreciated having these enhanced disclosures read to them and that they believed the loan details on the closing scripts were easy to follow, especially when read aloud. If implemented, these new reforms will surely ease the loan process for everyone involved.