Mortgage brokers say the regulation will be detrimental to the way they make money and likely force many small brokers out of business. Currently, mortgage brokers earn higher commissions through a yield spread premium. Consumer advocates, calling the practice a “kickback from the lender,” say it’s high time such a rule is being enacted. “They made more money when they were able to stick you with a loan that was worse than what you otherwise would have qualified for,” says Ira Rheingold, executive director of the National Association of Consumer Advocates in Washington, D.C.

But mortgage brokers counter that yield spread premiums are part of the retail banking process. Brokers receive wholesale pricing for home loans from banks and add in additional fees to cover their expenses while still remaining competitive with rates offered by other banks. Robert Petrelli, who owns Mount Vernon Mortgage Corp. in Weymouth, Massachusetts, says yield spread premiums are simply one way that mortgage brokers make money. Petrelli likened the process to that used by retailers who buy at wholesale and set a retail price above the wholesale cost to cover overhead and other business expenses. “Yield spread isn’t a kickback,” he emphasized, adding that banks outsource their mortgage business to brokers to save on overhead costs.

Mortgage brokers also point out that the new regulation would make it difficult for them to compete with big banks. Under the rule, brokers would be tied to a certain profit margin, while banks would have flexibility in the mortgage rate they charge customers. “We are hearing from mortgage brokers across the country that say they’re going to let all their loan officers go and become one-man shops,” says Mike Anderson, chairman of the government affairs committee for the National Association of Mortgage Brokers. The organization has filed a federal lawsuit against the Federal Reserve System requesting an injunction that postpones enactment of the new rule.

Regardless of how the new law changes the mortgage brokering landscape, mortgage finance experts say consumers should still do their homework and compare mortgage rates at several financial institutions, including mortgage brokers. “It really helps to get multiple offers or bids and compare them against one another and to try to bid them against one another,” advises Guy Cecala, publisher of Inside Mortgage Finance, which covers the residential mortgage business. Rheingold agrees, adding that the new law would make it easier for consumers to comparison shop by creating “a place where consumers have a better chance of not being cheated in the marketplace when they’re buying a mortgage.”

Sen. Richard C. Shelby (R-Ala.) has gone as far as accusing the CFPB of a “regulatory shakedown.” He cited the aggressive drive by the agency’s acting director, Elizabeth Warren, to implement strict penalties against mortgage companies as part of the mortgage settlement for improper and fraudulent lending practices. But in defending the actions of the CFPB, Warren points out that improper foreclosure practices would not have occurred if such an agency was in existence. “If there had been a cop on the beat with the authority to hold mortgage servicers accountable a half dozen years ago, if there had been a consumer agency in place, the problems in mortgage servicing would have been exposed early and fixed while they were still small, long before they became a national scandal,” she said.

Since President Obama signed the bill last July creating the CFPB, the agency has received criticism from Republicans, particularly over its expansive powers. The involvement of the CFPB in mortgage talks is the latest scuffle between Republicans and the Obama administration. But Warren isn’t backing down from the fight, emphasizing that the CFPB belongs in the mortgage talks because the issue impacts millions of Americans. “We know what can happen when laws aren’t fairly or consistently enforced because of political pressure, and it doesn’t end well for American families, for honest businesses, or for the economy,” she stressed.

In an effort to stifle the controversy before it becomes too heated and impacts mortgage settlement talks, U.S. Treasury Secretary Timothy F. Geithner issued a letter to Rep. Spencer Bachus (R-Ala.), chairman of the House Financial Services Committee, clarifying the role of the CFPB with regards to mortgage settlement negotiations. Geithner stressed that the CFPB “would not be a party to any formal settlement with mortgage servicers” because it does not have the authority to administer penalties. Although the agency will not be adding its signature to any negotiated settlement, Geithner said the CFPB is taking an active role in settlement talks because the agency will have “significant authority to set standards for the mortgage servicing industry” and will be advising federal agencies and state attorneys general “on how to design appropriate servicing standards.”

While Republicans try to push back the role of the CFPB and require congressional approval for its funding, Warren is reminding critics that the watchdog group was created to protect consumers. “Under the old system, seven different federal agencies were responsible for consumer financial protection. The tangle of seven agencies failed to create effective rules and left gaping holes in oversight. The CFPB will be directly responsible to the public for performing those core functions.”

While Republicans say the programs are ineffective, Democrats and White House officials argue that they are an important piece to economic recovery. During House Financial Services subcommittee hearings on the programs, David Stevens, assistant secretary at the Department of Housing and Urban Development, acknowledged that the programs aren’t working as effectively as originally planned. However, he stressed that, “Independent economists have indicated that these combined government efforts, while not sufficient on their own to enable the market to fully recover, were appropriate policy actions to help stem the vicious cycle of steadily declining house prices leading to escalating loan defaults.”

With $75 billion available in funding, the Home Affordable Modification Program is designed to lower mortgage payments of homeowners at risk of foreclosure so they can stay in their homes. Those who qualify typically realize a 40 percent reduction in their monthly mortgage payment. Despite the relief the program provides, critics, including Republicans, say it’s not reaching enough people and lenders have been more successful in providing mortgage modifications that don’t involve federal subsidies. At the end of 2010, an estimated 522,000 HAMP mortgage modifications were given. Expectations were that 4 million homeowners would be served by the HAMP program by 2012. “There are 3.3 million families who might have been reached by this program if only it had been better designed, better managed and better executed by the Treasury department,” said Neil Barofsky, special Treasury Department Inspector General charged with overseeing the Troubled Assets Relief Program (TARP) who is resigning his post at the end of this month.

Also targeted by the bill introduced by Rep. Patrick McHenry (R-N.C.), is the Neighborhood Stabilization Program. The initiative provides about $7 billion in grants to states, municipalities and nonprofit groups to buy, rehabilitate, rent or resell foreclosed and abandoned homes in an effort to create affordable housing and revitalize troubled neighborhoods hit hardest by the recession. But Rep. Gary Miller (R-Calif.) says the funds should be in the form of loans, not grants. “We’re giving $7 billion of taxpayer dollars to groups and organizations and cities and none of it comes back to the federal government. There is no requirement for repayment,” said Miller. “I think it’s a huge waste of taxpayer dollars. I don’t think there is adequate oversight of the funds, and if they sell the properties they keep the funds.”

In defending the mortgage modification programs, Rep. Luis Gutierrez (D-Ill.) pointed out that Republicans should focus on improving the programs instead of eliminating them. “Republicans are willing to give large breaks to the wealthiest in our nation yet they’re unwilling to provide the necessary aid to devastated families and distressed communities,” Gutierrez said. “Simply doing away with these critical programs that serve the American people without offering any real solutions that reform or replace these programs does nothing to alleviate our nation’s foreclosure emergency.”

Treasury Secretary Timothy Geithner warns that ending the mortgage modification programs would harm an already fragile housing market and “leave hundreds and hundreds of thousands, if not millions, of Americans without the chance to take advantage of a mortgage modification that would allow them to stay in a home they can afford.” The fate of the Republican bill remains questionable. The measure moves to the House floor, where the Republican-controlled House is expected to pass it. However, it is doubtful the bill would make it out of the Democrat-controlled Senate.

A 2010 report, “Financial Literacy Among the Young: Evidence and Implications for Consumer Policy” based on research conducted by Harvard University, Dartmouth College and The Wharton School, finds that “fewer than one-third of young adults possess basic knowledge of interest rates, inflation, and risk diversification” and that general financial literacy is low among youth. Financial experts say addressing personal finance in high school could prevent students from landing in debt as adults. And students agree. Evelyn Johnson, 19, said a personal finance class would have been a big help to her. “I think it would have prepared me for the real life cause it’s not easy at all. You just swipe, and you don’t look at what you have in the bank,” said Johnson. Tellers at financial institutions say the majority of young adults don’t know how to do basic financial tasks, a sign that they are not learning about personal finance at home.

Another study conducted by Jumpstart Coalition for Personal Financial Literacy finds that only 7 percent of high school students passed a test on basic financial knowledge. “It borders on criminal that we expect our kids to navigate this world without knowledge of things we know they are going to have to deal with: 401(k)s, mortgages, mutual funds, bonds, leases, insurance, taxes and so on. Students can analyze works of Shakespeare, find the vertex of a parabola, discuss the intricacies of photosynthesis and assess the end of the Cold War but are at a loss when it comes to working with a credit card. Something is wrong with that picture,” said Lance Suzuki, a high school teacher of economics and statistics at Maryknoll High School in Honolulu, Hawaii and the 2005 National Economics Teacher of the Year. He believes the sooner children begin learning about the basics of finances, the better. “The earlier that habit of thinking about the future can be ingrained, the better. Studies have shown that if kids have actual money management practice when they are young, they are more likely to be financially savvy as adults,“ said Suzuki, who developed and teaches an Economics of Personal Finance class to juniors and seniors.

U.S. Federal Reserve Chairman Ben Bernanke agrees that the disturbing results of the Jumpstart study supports the need for solid economics instruction for students in K-12. “We are reminded of how critically important it is for individuals to become financially literate at an early age,” Bernanke said, “so that they are better prepared to make decisions and navigate an increasingly complex financial marketplace.” But opponents to school-based personal finance classes say that teachers simply don’t have the time to teach something extra with all the teaching mandates already in their curriculum. But lawmakers insist that personal finance lessons can easily be incorporated into math or social studies. In fact, about 25 school systems have already found a way to include financial literacy classes either as an elective or a graduation requirement.

Currently, the U.S. has no formal standard for financial education. Financial institutions and nonprofit agencies generally pick up the slack and offer personal finance programs. “Nonprofits end up being the conduits for some of those social programs. I think that there is a general understanding that if the government wants to do something and be successful while reaching a certain number of people, they sometimes depend on community-based organizations,” said Anna Dioguardi, director of community organizing and development at the Queens Community House in New York City, which receives some government and private funding for its community education programs on financial education for youth and immigrants.

However, not everyone takes advantage of community services, and for that reason, experts say financial education belongs in schools. “If we don’t offer it in schools, if we don’t offer it in a vigorous way, there will be very few opportunities for people to learn,” said Annamaria Lusardi, director of the Financial Literacy Center, a joint center of the RAND Corporation, Dartmouth College and Wharton School. She and many other financial experts say financial education needs to be a required subject in schools. “If we don’t push for financial education,” says Lusardi, “the youth will not be informed and will start their lives without being financially literate, at a moment when they need to make very important decisions on how to invest in their own educations.”

To replace Fannie Mae and Freddie Mac, the “Reforming America’s Housing Finance Market” report to the U.S. Congress recommends opening the playing field so private capital – which backed away during the financial crisis – returns to the housing finance market. Under the Obama plan, the private sector would be the main source of mortgage credit and assume the burden for losses. To attract private capital, the government would end Fannie Mae’s and Freddie Mac’s capital advantages over the next few years, increase Fannie’s and Freddie’s conforming loan limits to the levels established in the Housing and Economic Recovery Act (HERA), and gradually increase the down payment requirements of Fannie Mae and Freddie Mac.

The Obama administration’s plan would also reduce the investment portfolio for Fannie Mae and Freddie Mac at an annual rate of no less than 10% per year and begin returning the Federal Housing Administration (FHA) to its traditional role. “This report provides a strong plan to fix the fundamental flaws in the mortgage market and better target the government’s support for affordable homeownership and rental housing,” said U.S. Housing and Urban Development Secretary Shaun Donovan. “We must continue to take the necessary steps to ensure that Americans have access to quality housing they can afford. This involves rebalancing our housing priorities to support a range of affordable options, from promoting much-needed financing for quality, affordable rental homes to ensuring the availability of safe, and sustainable mortgage products for current and future homeowners.”

For home buyers, the Obama plan is not very promising, since it is likely to result in higher borrowing costs and larger down payments. And industry officials say the changes will mean that home loans will be harder to secure. “Even today we’re seeing for consumers a tighter credit box; it’s more difficult for consumers to get mortgage loans and to qualify,” John Courson, president of the Mortgage Bankers Association, points out.

Officials caution that they will move slowly in phasing out Fannie Mae and Freddie Mac to prevent any adverse ramifications to an already fragile home sales market. Currently, the federal government backs nine out of 10 new mortgages, so baby steps in removing that support are necessary to minimize the impact to economic recovery. “We are going to start the process of reform now, but we are going to do it responsibly and carefully so that we support the recovery and the process of repair of the housing market,” says Geithner. Officials estimate a timeframe of five to seven years before Fannie Mae and Freddie Mac are completely phased out.

While the report offers a viable framework for mortgage reform, the Obama administration’s recommendations still have to survive debate among members of the U.S. Congress and the powerful financial services industry, which is not too keen on shouldering the burden of loss. It should be quite a debate.

According to the CFPB’s website, its one goal is to “watch out for American consumers in the market for consumer financial products and services.” The agency is structured to “make consumer financial products and services work for Americans.” The formation of the CFPB is a direct result of deceptive lending practices that led to the financial crises. President Obama proposed an agency that would protect consumers going forward and address gaps in the consumer protection system. The CFPB consolidates supervision and enforcement responsibilities that were scattered throughout government departments and agencies. Created in the U.S. Congress by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB focuses strictly on the consumer and has complete supervision and enforcement of laws that govern providers of consumer financial products and services.

At the CFPB site, consumers can submit their ideas by email, Twitter or YouTube. Still to come on the CFPB website are a consumer response center where consumers can submit questions and complaints about financial products and services, and an office of financial education with financial literacy and consumer education programs. And starting July 21, the agency will have the authority to write and enforce federal consumer financial laws.

Since the website’s launch on February 3, the CFPB has received numerous comments from consumers regarding improving the fine print in credit card agreements, ending aggressive mortgage lending, addressing arbitrary rate increases on credit cards, and preventing banks from adding overdraft protection to checking accounts without notifying the customer. However, some consumers question spending more tax dollars on creating another government agency, and others wonder whether adding more oversight to an already highly regulated banking industry is necessary.

Those who work in the financial services industry are also weighing in on the role of the CFPB. For instance, a mortgage banker looks forward to the “honest, level playing field the law represents” and hopes the CFPB can help lenders better understand the 400-plus mortgage lending law that goes into effect in April. However, not everyone in the industry are in favor of the CFPB. “There were much more effective ways of addressing real problems it was designed to address. It has enormously aggressive powers and it doesn’t really replace anything. It’s just adding another regulator,” says Andrew Sandler, co-chairman of BuckleySandler LLP, a legal firm that represents the nation’s leading banks, mortgage lenders, credit card companies, insurance companies and other financial services companies.

Until the CFPB is in full operation, it’s difficult to judge its effectiveness in protecting consumers. On the surface, federal policing of financial products is a good thing for both consumers and financial institutions because it will result in better communication between them. And in the long run, financial institutions will benefit as well with better informed customers.

Remember when you purchased your home? Maybe it was your first home or maybe you were a seasoned pro and the allure of walking through the doors of your new dwelling no longer excited you. Regardless, you undoubtedly knew that your home was an investment and in 5 to 10 years along with some improvements, you could stand to make some money on your purchase.

Unless you’re an economist, an investor, or other financial professional, there’s a good chance that you didn’t know that home prices were rising much too fast. You didn’t know that just around the corner a blowout would happen.

The Recent Economic Meltdown

In 2008 the blowout occurred. The economy had a severe meltdown and home prices dropped rapidly. When the dust cleared, you went to bed in a home that had lost half of its value or more. You were paying a mortgage that, if you paid the entire 30 years, you would most likely still lose money.

To compound the problem, you may be one of the 9.5% of Americans who were unemployed. You were a victim of the bad economy. You were considering sending your house keys to the mortgage lender and walking away.

The Economic Stimulus Plan

On March 4th, President Obama came to the rescue. As part of the stimulus plan, Obama made it possible for people to refinance their home loan at a 4.5% interest rate. This was done in the hopes of keeping people from walking away from their mortgages.

This interest rate has limitations. It has to be a refinance or a first home purpose. This keeps the real estate investors from using this rate to buy homes as investments. With more than a 3 trillion dollar price tag, the Obama administration wants to minimize the cost as much as possible.

Additionally, as part of the stimulus package, Obama was hoping that with lower mortgage payments, consumers would use their extra money to make purchases. This would help stimulate the economy. While that hasn’t happened on a large scale, it has helped to keep people in their homes.

If you are one of those who has lost your job or is considering walking away from your home, talk to your lender. This program, and others, may be able to help you make your home more affordable.

How the 3 Day Right of Rescission Works

The law gives a borrower 3 full business days to rescind, or change his mind, after signing the loan documents. That means you can sign your loan docs on Monday, and if you go home and notice there’s a mistake on the loan documents and the interest rate is significantly higher than expected, you have 3 full days to fax in your notice of rescission to the lender and you won’t lose anything because of it.

An Example

The 3 full days begin the day after you sign your loan documents and do not include Sundays and federal holidays (list of U.S. federal holidays), but do include every other day, including Saturday. For example, if you sign your loan documents on a Thursday, the 3 days doesn’t begin until Friday. The first day is Friday, the second day is Saturday, you skip Sunday, and the third day is Monday (assuming Monday’s not a Federal holiday). In this example, you would have until Monday at midnight to send in a written notice of rescission to your lender.

The rescission notice can be anything typed or hand-written by you notifying your lender that you would like to rescind. Be sure to include your name, loan number, your lender’s name, and the current date and time on your notice. You can also find sample notices by searching Google for “Rescission notice.” The notice can be faxed or mailed to your lender.

If you mail the notice, the 3-day rule says it only has to be dropped into the mailbox by the rescission deadline. So, in the above example – your rescission period ends on Monday at midnight – you could drop the letter in the mailbox at 11:59 pm on Monday and you would have just made the deadline. Obviously they have no way of knowing whether you dropped it in the box at 11:59 pm on Monday or if you were a bit late and dropped it in at 12:01 am on Tuesday, but that’s the rule.

Another Example

Now let’s say you sign your loan documents on Friday, but the following Monday is a federal holiday. Your rescission period begins the day after signing, which would be Saturday in this case. We skip Sunday, but we also skip Monday since it’s a federal holiday. So day 2 would be Tuesday, and day 3 would be Wednesday. You would have until Wednesday at midnight to rescind in this example.

Calculate Your Funding Date Based on the Rescission Period

If you’re wondering when your loan will fund, it’s simple to calculate, it’s just the day after your rescission period expires. So, in the previous example, where Monday was a holiday and the rescission period expired on Wednesday at midnight, your loan would fund sometime on Thursday. The exact time really depends on a number of factors, but I’ve found it’s usually before noon.

When Your Right to Rescind Does Not Apply

It’s important to note that the 3-day right of rescission does not apply to all types of mortgages. Here are some examples of when the 3-day right of rescission does not apply:

1. Does not apply to purchase mortgages, only to refinances
2. Does not apply to refinances if you refinance with the same lender
3. However, if you refinance with the same lender and take cash out, it does apply to the cash out portion of the loan
4. Only applies to refinancing of your primary residence (doesn’t matter what type of home – i.e. manufactured, mobile, etc)
5. Does not apply when you borrow money for your business
6. Does not apply when you borrow from a state agency

It Gets a Bit More Complicated Now

Those are the basics of the law, however, there are some interesting quirks that you may never have to deal with, but we’ll share them anyway just in case . The 3-day clock doesn’t actually start ticking until 3 conditions have been met, however, in the vast majority of cases, all 3 of these things will happen on the signing day. Nonetheless, the conditions are:

1. Borrower must sign the loan papers
2. Borrower must receive a copy of all loan disclosures
3. Borrower must receive a copy of the Notice of Right to Rescind

In the rare case that your lender does not supply these on the day of your signing, the rescission period can run up to 3 years after your signing date. In such a case, should you decide to rescind, say, a year later, your lender’s security interest in the property becomes void and they must reimburse you for all finance charges collected over the life of the loan.

Additionally, the right to rescind applies to anyone with an ownership interest in the property. For example, if your husband is on Title, but will not be signing for the loan, he still has the right to rescind because the Title grants him ownership interest in the property.

Now, if you’ve really been paying attention up to this point – and bravo for you if you have – you may be wondering why the rule only requires that you drop your rescission notice in the mailbox by the deadline and not that the lender receives your notice by the deadline. Because your loan funds the day after your 3-days expire, and if you drop your rescission notice in the mailbox at 11:59 pm on the 3rd day, your loan will undoubtedly fund before the lender receives your notice.

Well, you’re right about this…in such a case you’d end up having to pay the lender right back. The law only requires that the lender be reasonably satisfied that the owners have not rescinded before releasing the funds from escrow. It ends up being a hassle for you and, especially, for your lender. That’s why it’s always a good idea to give your lender a call before the deadline if you plan to rescind. That way you can avoid the hassle of having to pay back the full amount of the loan. Incidentally, the potential for something like this to occur is just the reason your loan officer/broker may call you on the last day of your rescission period just to check that you haven’t decided to rescind or, in some cases, your lender may request written confirmation that you or anyone else with ownership interest in the property has not decided to rescind.

Waiving the Right of Rescission

While the 3-day right of rescission is designed to protect borrowers, it can also be a burden. The lender will not release funds from escrow until the day after the rescission period expires, but what if you need those funds immediately? What if your house was hit by a tornado and you need the funds to make repairs or you’ll have nowhere to live? In such a case, and only if you have a “bona fide personal financial emergency,” you can opt to waive your right of rescission and have your loan fund 3 days sooner.

If you’re interested in more information, you can check out the FDIC’s page on the topic of rescission at http://www.fdic.gov/regulations/laws/rules/6500-200.html#6500105

• Truth in Lending Act requires a lender to tell you how much it will cost to borrow money so that you can compare the terms of credit offered by different lenders.
• Fair Credit and Charge Card Disclosure Act requires a lender offering you a credit card to tell you the annual percentage rate (APR), the amount of any annual fee, and whether
• Fair Credit Reporting Act controls how your credit history (how you pay your bills) is kept by credit bureaus and used by lenders
• Equal Credit Opportunity Act prohibits lenders from discriminating against you in a credit transaction on the basis of certain personal characteristics such as race, color, religion, national origin, sex, marital status, age, because you receive public assistance or because you’ve exercised your rights under the Consumer Credit Protection Act.
• Fair Debt Collection Practices Act lays out the rules a debt collector must follow when trying to collect a debt from a consumer.
• Home Equity Loan Consumer Protection Act requires a lender to give you complete information about the home equity loan plan it offers—first when you receive an application and again before you first use the line of credit.
• The Home Ownership and Equity Protection Act requires disclosures and imposes substantive limitations on mortgage transactions having rates or fees above a certain percentage or amount. It also requires disclosures about the potential costs for reverse mortgages.
• Fair Housing Act prohibits lenders from discriminating against you in real estate mortgage or home improvement loans on the basis of race, color, religion, national origin, sex, familial status, or handicap.
• Real Estate Settlement Procedures Act states that lenders must give purchasers information about the costs required to close a mortgage loan. It also protects consumers from unnecessarily high real estate settlement costs by prohibiting certain business practices. This applies when you take out or refinance a loan secured by real estate such as a mortgage loan or a home equity loan.
• Fair Credit Billing Act requires that a lender promptly correct a mistake on your credit card bill.
• Truth in Savings Act requires lenders to disclose the terms of their deposit accounts in a uniform way.
• Consumer Leasing Act requires the costs and the terms of a consumer lease, such as a lease for a car or for furniture, be outlined to you so that you can compare the cost of leasing.

Licenses Required for Mortgage Originators

For the first time, mortgage originators are now required to be registered and licensed on the national level. This is a big change over the past when originators could, quite literally, be pulled off the street, handed a phone, and selling mortgages in the same day. Obviously, this appears to be a step in the right direction in overcoming mortgage fraud, and it’s something the National Association of Mortgage Brokers has been a vocal proponent of for some time.

HERA Won’t Be Active Until October 1st, 2009

Like most laws requiring major changes, states aren’t required to have licensing systems in place until the beginning of October, 2009.

Does this mean no more convicted felons in the mortgage business?

A few weeks into my first mortgage job at the height of the refinance boom in Southern California, the police suddenly showed up asking for one of my co-workers. The guy wasn’t working that day, but needless to say, I asked around and imagine my surprise when I was told this guy had recently been released from prison and, apparently, had violated his parole!?

Well, I left that company real quick!

After You Sign the Papers

We’ve covered the mortgage process a bit in the past, but we’ll give you a quick refresher here. In many cases, soon after a borrower signs his or her loan documents the loan is sold to investors on the secondary mortgage market. This happens more often than most people realize, in fact, even if you’ve got a loan with a major company like Wells Fargo or Bank of America, those lenders may still opt to sell the loan to investors.

When Mortgages Are Sold

Now, when mortgages are sold, generally they’re split into two major parts.

First is the actual mortgage itself, which is bundled with a bunch of other mortgages and sold to an investor in the form of bonds or some other investment vehicle. When you make a payment to the company servicing your loan (covered in the next paragraph), that company takes a small percentage and pays the rest to the investor. So, while you’re making monthly payments, the investor is receiving them, after the servicing company takes its cut.

The second part of the mortgage that is sold are the servicing rights. This is the portion that, if you’ve ever had a mortgage, you’re more familiar with (more so than you probably think at least). Servicing rights grant a company the right to handle, well, the servicing of your mortgage. Whatever company you’re making payments to is the company that holds the servicing rights to your mortgage. That company takes a small cut, usually around 0.25%-0.5%¹ of the monthly payment in return for handling all the administrative tasks that come with servicing your loan, like sending out statements, collecting past due payments, etc… After that, the rest of the monthly payment is sent to the investor who bought the investment vehicle your loan is bundled into.²

What If Your Original Lender Goes Bankrupt?

If the lender who you got the loan through originally goes bankrupt, you may not even know about it. If that lender sold off both the mortgage and its servicing rights, you wouldn’t even be making payments to them anymore. They’ve essentially taken themselves out of the loop entirely this way.

Some of the larger companies will keep the servicing rights and sell off just the mortgage as an investment vehicle. If your lender goes bankrupt after this happens, the lender will be forced to liquidate its assets, in other words, it has to sell the servicing rights to someone else. Since we’re talking bankruptcy here, those servicing rights will generally sell at a discount and, in many cases, people/companies will be fighting tooth and nail to get to purchase those servicing rights. Once a deal is struck, the biggest change you’ll notice is that the company you send payments to will change. Most homeowners have had their mortgage servicing rights sold at one point, although it doesn’t always mean their lenders went bankrupt.

What If the Servicing Company Goes Bankrupt?

If your original lender sells off both the mortgage, as well as its servicing rights, you’ll have to start making payments to the new servicing company. Now, what if that company goes bankrupt? Same as above…that company will be forced to liquidate its assets, of which your mortgage servicing rights are one of those assets, and those rights will be sold at a discount to another company or investor, at which point you’ll have to start making payments to yet another new company.

What If the Investor Who Bought Your Mortgage Goes Bankrupt?

Now that we’ve covered the servicing side of things, what if the investor who bought the actual mortgage itself, as some sort of investment vehicle, goes bankrupt? Well, that’s just like if you bought some stock in a company and then you had to declare bankruptcy; you might sell the stock to someone else, or you might lose it in a lawsuit, either way, the company who’s stock you own isn’t really going to be affected. Likewise, if the investor who bought your mortgage goes bankrupt, you likely won’t even know about it.

Will the Terms of the Mortgage Change?

No. No matter what happens, no matter how many times your loan is sold or how many companies holding it go bankrupt, the terms of your mortgage will never change. Now, you may have to start making payments to a new company, and that can be a bit of a hassle, especially if it happens several times, but your 5.5% 30-year fixed (or whatever) will stay a 5.5% 30-year fixed.

Why All This Buying and Selling Mumbo Jumbo?

So, the question still remains, why are there all these companies that handle these different aspects of your mortgage? Aren’t they all middle-men jacking up the cost you ultimately pay for your home? Well, no, and we don’t want to leave you hanging, but that’s a topic for the next article here at Truthful Lending.

Also, if you haven’t seen our brand new Debt Free Calculator, take a look.

Sources:

1. New York Times
2. Mortgage News Daily
3. MSNBC
4. Bloomberg News

The Federal Housing Administration

FHA stands for Federal Housing Administration, and, among other things, it insures mortgages for low to moderate income Americans, allowing them to qualify for loans that they normally wouldn’t qualify for because, if an FHA insured loan defaults, the bank doesn’t lose because the loan is insured by the U.S. Government.

You see, normally the lender, or Private Mortgage Insurance (PMI) companies assume the risk of default on a home loan, however, many would-be homeowners can’t qualify for traditional loans and aren’t afforded coverage by PMI companies, so the FHA steps in to help some of those people.

How FHA Secure Works

FHA Secure is the name of the new plan to help homeowners struggling as a result of the current mortgage market woes. The program will allow homeowners with adjustable-rate mortgages (ARMs), who are late on their payments because their loan adjusted, to refinance into FHA secured, fixed-rate loans. There are a few qualification requirements, the biggest of which is that the homeowner must not have been late on any payments before the loan’s rate adjusted and the payments went up.¹

Where The Controversy Lies

There is a certain bit of controversy over the new FHA Secure program, and it lies in a debate between who is at fault when a loan adjusts. Since the FHA is funded by tax-payers, there is a question as to whether tax-payer money should go to bail out homeowners who signed for the loan they were given, and thus, should be held responsible for any negative consequences years down the line, such as increasing rate and payments.

The other side of argument is that the homeowners in trouble were essentially duped into signing for adjustable-rate mortgages by shady mortgage professionals who were dishonest about the loan terms and, as such, should be given assistance to get out of their current situations.

Whoever is at fault, FHA Secure aims to solve the problem with government assistance. If you’d like to find out more about FHA Secure, you can do so at the Federal Housing Administrations Website.

Sources:

Federal Housing Administration, http://www.fha.gov/about/fhasfact.cfm