Last Thursday the Federal Reserve agreed on proposals that would make it easier for home-owners with mortgages or those looking for mortgages to better understand just how home mortgages work.
One significant contributor to the housing market crash was the lack of understanding on the borrower's part of the terms of the loans and bought homes that they just could not afford.
Fed Chairman Ben Bernanke said "Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances. It is often said that a home is a family's most important asset, and it is the Federal Reserve's responsibility to see that borrowers receive the information they need to protect that asset."
Some of the changes would include the requirement of lenders to explain to potential borrowers some of the risky aspects of a loan that might include prepayment penalties. One way for lenders to accomplish this is through a one page summary page, in layman's terms, which would include frequently asked questions and answers to commonly misunderstood items regarding mortgages. Furthermore, there would also be the necessity to explain the APR, annual percentage rate, as well as settlement costs.
When borrowers are looking into adjustable-rate mortgages, lenders will be required to go over how their monthly payment will change in order for the borrower to completely understand the risk potential of an adjustable loan.
Other terms that the Federal Reserve agreed on are the fact that lenders would also have to provide borrowers a monthly statement of payment options with amounts that don't just cover the interest of the loan but it would explain the consequences that the different payment options would have on the life of the loan.
On a good note, there would be a ban of certain payments to loan officers and mortgage brokers that are solely based on the loan's terms or conditions and would further prohibit lenders from pushing borrowers into loans that aren't in their best interest just so brokers and loan officers can get a bigger compensation.
Banks are welcoming the Fed's efforts but remain uncertain if their plan would indeed lead to better-informed borrowers and the banks hope that these proposals would both simplify and clarify the mortgage process for borrowers.
Now that the Fed has agreed to these new terms; lenders and the public alike have 120 days to make comments on these new proposals and once those are received by the Fed they will make additional changes and take a final vote.
Whether it's a 30 year fixed rate loan or an adjustable-rate loan with a low down payment, the Fed's goal is to not only make sure that consumers receive the information they need, but that they can also understand it as well.