As of 2015, lenders must clearly explain interest rates, payments, closing costs
Home buyers baffled by the details of their mortgage — the largest financial commitment many of them will ever make — will be getting help from new federal rules that aim to make the loan easier to understand.
The "Know Before You Owe" rules, issued last week, will take effect on Aug. 1, 2015. They will require lenders to give borrowers two forms — one shortly after applying for a loan, one three days before closing — that will use plain language to explain the interest rate, monthly payments and closing costs.
The rules were issued by the federal Consumer Financial Protection Bureau in response to the housing crash, which resulted in many borrowers defaulting on their mortgage loans. The CFPB says that with better disclosure, borrowers would have been better prepared to avoid risky loans.
The new rules replace 30-year-old rules requiring that lenders give borrowers Truth in Lending statements and an HUD-1 uniform settlement statement. The CFPB said that in tests, consumers found the new forms easier to understand and more helpful in figuring out whether they can afford a mortgage.
When exotic mortgages were being written during the housing boom, homeowners often unknowingly got into toxic loans, according to Phyllis Salowe-Kaye, head of New Jersey Citizen Action, the state's largest housing counseling agency. She said struggling homeowners were surprised to find that their interest rate was set to jump, or that they owed a large balloon payment after several years.
"A lot of people never knew it was even in their mortgage," she said. "People had no idea."
Allen Susser, a real estate lawyer in Saddle Brook, said current mortgage disclosures can be "terribly confusing," but said he was skeptical that the new disclosures would explain matters any better.
Dave Stein, chief operating officer of Residential Home Funding in Parsippany, also said that while it's a good idea to clarify mortgage disclosures, previous efforts to do that have not been very successful. And he said consumers must do more to educate themselves.
"I know they always have the consumer's best interest in mind, but consumers often don't take the time to understand it," he said. He and Susser said the requirement that borrowers get the documents three days before closing could delay closings.
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Fewer U.S. homeowners are falling behind on their mortgage payments, aided by rising home values, low interest rates and stable job gains.
The trend brought down the national late-payment rate on home loans in the third quarter to a five-year low, credit reporting agency TransUnion said Tuesday.
The percentage of mortgage holders at least two months behind on their payments fell in the July-September quarter to 4.09 percent from a revised 5.33 percent a year earlier, according to the firm, whose data go back to 1992.
The latest rate also declined from 4.32 percent in the second quarter.
The last time the mortgage delinquency rate was lower was the third quarter of 2008.
Within a few years of setting that mark, foreclosures began to mount as home values tumbled from housing-boom highs, leaving many homeowners in negative equity — owing more on their mortgage than the value of their home. The dynamic drove mortgage delinquencies higher, peaking at nearly 7 percent in the fourth quarter of 2009.
The rate of late payments on home loans has been steadily declining over the past five quarters. At the same time, U.S. home sales and prices have been rebounding over the past two years, while foreclosures have been declining.
Moderate but stable job gains, still-low mortgage interest rates, and tight supply of homes for sale have helped fuel the housing rebound. That's also made it easier for homeowners to refinance, catch up on payments or sell their home, avoiding foreclosure.
Even so, the mortgage delinquency rate is still above the 1 to 2 percent average historical range. That suggests that many homeowners still are struggling to make their payments. It also reflects that many home loans made during the housing boom remain unpaid but have yet to work their way through the foreclosure process.
Loans made in the years after the housing boom are generally being paid on time, so as more of the older loans listed on banks' books as unpaid get resolved, the overall mortgage delinquency rate should continue to decline, said Tim Martin, group vice president of U.S Housing for TransUnion's financial services business unit.
"The new mortgages are still performing very well, at very low delinquency rates," Martin said. "That's why we're expecting more improvement to come."
TransUnion forecasts that the national mortgage delinquency rate will drop to just under 4 percent by the end of year.
All the states posted an annual drop in late-payment rates during the third quarter, with California, Nevada, Arizona, Colorado and Utah registering declines of more than 30 percent.
TransUnion draws its data from 52 million installment-based mortgages in the U.S.