The last session of the North Carolina General Assembly did a number of things, most of which were not particularly notable, except for raising a number of taxes. One thing of interest to home buyers and sellers, especially in the light of the recent mortgage lender debacle, is that the state tightened regulations on mortgage brokers. The new law (see it all here) purports to save all of those poor people who the legislature thinks are not smart enough to look after themselves.
For instance, they have banned pre-payment penalties for what they define as a “rate spread home loan.” This encompasses loans (in general) that we have lumped into the group of “sub-prime” loans. This sounds good, but will it help? Or will it be one more nail in the coffin of sub-prime borrowers being able to obtain financing? Who is going to want to loan money in this arena if they are regulated to the point that they cannot make an appropriate return on the level of risk they assume?
If lenders cannot be assured that they will make a decent return, they will just stick to loaning money to folks with big down payments, regular jobs (not self-employed) and excellent credit. These borrowers have been adequately served since the beginning of home mortgages. The borrowers on the margins are the ones that will be hurt by some of these laws.
There are some good things in this new law, too. For one, it strengthens the fiduciary duty that brokers have to their clients. For another, a lender cannot underwrite a loan based on an initial rate, if the eventual rate would not be affordable. It is hard to understand that underwriters were ever allowed by the lenders to do this in the first place. It seems that if a borrower could not qualify at the higher rate, that it would not make sense to loan him the money, knowing that in two years, he would likely default.
The selling point was that people, with a year or two of on-time payments under their belt, could improve their credit score and refinance into a conforming loan at a much lower interest rate. The trouble is that credit scores, which are history of behavior, turned out to be just what they were intended to be: Good predictors of future behavior! Many of the folks with bad credit, who got subprime loans, kept on making a subpar effort to pay their bills, and kept the very same bad credit that they started with. Thus, they can not refinance into a conforming loan, and either must keep paying their newly higher interest rate, or just give up and let the lender foreclose.
Hopefully, the market has made the adjustments to get rid of the problem loans. Time will tell!
