New Fed Mortgage Regulations Likely to Lower Rates for Borrowers says Report

New regulations from the Federal Reserve to restrict loan originators compensation will likely lower rates and fees for borrowers according to a report from Moody’s.  The regulations, which go into effect on April 1st, 2011, prohibit double-charging for origination fees and steering borrowers to less-than-optimal mortgage products in return for higher compensation.

“We expect rates to be lower as a result of the elimination of commercially motivated overcharges, ” Moody’s says. “Lower rates should result in lower payments, which would translate, all else being equal, into lower defaults, a credit positive.”

Additionally, the new rules no longer permit mortgage brokers or loan officers to charge both the borrower and the lender an origination fee for the same loan, and as a result, some borrowers’ monthly payments will include fewer add-ons in the form of amortized points and fees.

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Moody’s believes the changes will result in competitive market segments where lenders pay the origination fees in the form of commissions rather than having them paid by borrowers in the form of points and fees.  However, the report says that in less competitive segments, the broker or salesperson might still opt to charge the borrower directly through points and fees rather than charge the lender, resulting in these borrowers not necessarily benefitting from the new rule.

“From a lender’s or investor’s perspective, the fact that the borrower bears the cost of the origination fee suggests a riskier profile, which is additional valuable information that the loan file may not otherwise reflect.”

Moody’s remains uncertain about the consequences for securitized loans originated after the effective date that fail to comply with the new rule.

“We are in the process of evaluating the legal implications of non-compliance to determine if any penalties associated with non-compliance could eventually result in a loss to the securitization trust.”

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  • I think Moody’s has it wrong – this will just allow the banks to eliminate competition, and thereby INCREASE the overall cost to consumers. I’m all for providing good value to consumers, but so much for free market capitalism. What’s next, controlling the cost of autos? How about the cost of housing? Obviously the banks’ lobbying efforts have been successful.

  • I agree with Lance. The money has to come from somewhere. It’s just being packaged differently. Soon there will be (low) maximums established that will drive many more out of the industry. Less competition is never a good thing.

    Lower rates should reduce defaults on refinanced properties. Purchase loans are another thing. Lower rates mean people qualify for larger loans, not necessarily even considering the lower payment on properties that they could truly afford.

    • Right – the revenue has to come from somewhere. And meanwhile the banks will be collecting a bigger piece of the revenue pie via rebates that they aren’t required to disclose, giving them even more power to eliminate competition. This is a perfect example of over-regulation doing the exact opposite of its intention, and why free market capitalism is the bet model.

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