Among the more interesting of the Federal Reserve proposals for amending the Truth in Lending Act (TILA) is one to expand the disclosures required at application. The purpose is to encourage borrowers to shop before they commit themselves.

The major new disclosure is one called “Key Questions to Ask About Your Mortgage”. The heading atop the list of key questions states “The only way to make sure you get the best possible loan terms is to talk to several lenders: SHOP, COMPARE, NEGOTIATE”.

This is a great idea, except that the 7 questions posed by the Fed will be answered in the same way by every lender. I will illustrate with answers to the first 3 questions that would work for every lender.

Fed Question: “Can my interest rate increase?”

My Answer: It can if you select an adjustable rate mortgage (ARM).

Fed Question: “Can my monthly payment increase?”

My Answer: It can if you select an ARM, or a fixed-rate mortgage (FRM) with an interest-only option.

Fed Question: “Will my monthly payments reduce my loan balance?”

My Answer: It will unless you select an FRM with an interest-only option, or an ARM with an interest-only option or a negative amortization option, and you take advantage of the option.

I could do the same with the remaining 4 questions. The problem is that the questions apply to mortgage types or options rather than lender operating policies. Since with minor qualifications all lenders offer the same types of mortgages and options, they will all answer the 7 questions in the same way. The answers would be useless to borrowers trying to select among different lenders.

To help borrowers select from among different lenders, the questions must apply to lender operating policies, not to their mortgages. There are important differences in operating policies that borrowers currently have no way of knowing. The following are 7 questions that I would want the answers to if I were selecting a lender.

Q: Do you allow your loan officers (LOs) to charge “overages?’

Comment: I would not want to deal with an LO who has a financial incentive to over-charge me. An overage is a price higher than the price the lender shows on its price sheets, which show the prices the lender will accept. Overages are usually shared with LOs, encouraging them to charge what the traffic will bear. Some lenders do not allow overages, and this disclosure at the point of application will give them the edge they deserve.

Q: Do you have a financial interest in, or a financial arrangement with any of the third parties providing services to your borrowers?

Comment: I would not want to deal with a firm that referred me to title agents or other service providers in which they had a financial interest. Over-charges on third party services are chronic, and lender deals with service providers are a major reason. The RESPA restrictions on payment of referral fees has had no impact but a disclosure requirement would. Note to home purchasers: this is also a good question to ask your Realtor.

Q: Are any of your mortgages (other than HELOCs) simple interest, or convertible into simple interest?

Comment: I would not knowingly take a simple interest mortgage because it accrues interest daily, eliminating the benefit of having a payment grace period. It has never been a required disclosure, and some borrowers have been surprised to find themselves with one. In some cases, borrowers have been converted to simple interest after their loan was sold because their note could be interpreted as permitting it.

Q: What must a borrower do before you will lock the price of their loan,

and will you provide a written lock confirmation?

Comment: I would not deal with a lender that did not have well-defined rules regarding exactly when I was able to lock the price, with confirmation of the lock in writing. Ambiguity that in effect allows the lender to lock when it wants to lock can seriously disadvantage borrowers who have no place else to go..

Q;: What fees must a borrower pay to lock, and under what circumstances are they refundable?

Comment: This is another essential part of a lender’s lock policy.

Q: When you lock the price of a mortgage, do you also lock the total of your fixed-dollar lender fees?

Comment: I would not deal with a lender that did not include all its charges in the lock. Most lenders lock only the rate and points, leaving fixed-dollar fees outside the lock. This practice makes the borrower vulnerable to fee escalation as the loan goes to closing. The Fed recognizes the problem in its reform proposals, but its remedy is to require that the lender raising its fees issue another TIL statement. All that does is give borrowers advance notice that they will be fleeced at closing.

Q: What proportion of your loan officers are certified financial planners?

Comment: Most replies in the short-run will be zero, but this puts the borrower on notice that the LO really isn’t qualified to offer financial advice. In the long-run, it may stimulate lenders to upgrade the quality of LOs.

- By Jack Guttentag

Jack is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania.  Comments and questions can be left at http://www.mtgprofessor.com

Jack Guttentag Pulse

Interest rates were a little lower this week, but only for the relatively small group of prime borrowers who qualify for the best rates. There are no signs yet of any easing in the tough eligibility standards that have resulted from the financial crisis. These standards are unreasonably restrictive, and prevent all too many consumers from purchasing a home or refinancing their current mortgage.

Much of this can be laid at the feet of Fannie Mae and Freddie Mac, who have substantially increased the rate penalty for not being a prime borrower. Anyone with a credit score below 740 pays a risk premium. Want to take cash-out of a refinance, the premium is bigger, and if the house is rented, the premium increases even more.

The private mortgage insurers, attempting to recover some of their losses on defaulted loans, now require a credit score of 680, which is only slightly below the national average. That means that almost half of all borrowers don’t qualify for mortgage insurance, and therefore can’t get a loan without putting 20 percent down.

Yes, life can be unfair, but instead of drowning yourself in self-pity, we recommend you start down the road toward becoming a prime borrower. The chances are very good that low rates for prime borrowers, and low house prices, will continue for some time, so if you can manage to shift yourself into the prime category within the year, the deals will still be there.

That means learning to understand why your credit score is not as good as it should be, and exactly what you need to do to raise it. That takes a little time. It also means understanding why you don’t have the cash needed to buy a house, and how to establish the control over your finances that are needed to accumulate cash. Developing the budgets and savings plans required for this also takes a little time. But you will have a mortgage for a much longer period, and if you are a prime borrower, you will save a ton.

The writer is mortgage lender with over 20 years of experience and one of the founders of www.home-account.com . Comments and questions that require response jack@home-account.com

Jack Guttentag Pulse

Is the recession over?  Well the HOUSING recession, which is what matters to us at Home-Account, definitely isn’t over.  It would be easy to argue that the general recession isn’t over, either, but who wants to be a party-pooper?

In terms of the housing market, though, we are probably a year or more from being in the clear.  What matters aren’t just rates and approvals but the rebuilding of a healthy and profitable mortgage industry and that hasn’t happened yet.  Mortgage

losses for the banking industry should continue to run at high levels for an extended period of time. Third-quarter loan losses on mortgages should be higher than in the first and second quarters. Non-performing residential mortgage loans will continue to build.

Economic data, while somewhat more encouraging lately, is far from definitively turning the corner. We are currently in the seasonally strong period for home prices and this may be helping the most recent data more than many experts would like to admit.

Housing affordability has improved markedly for all homebuyers, but real mortgage rates remain high.

Eighteen percent of mortgage defaults in 4Q2008 were from strategic defaulters, (those who could pay but were so underwater they decided not to pay). Others estimate the current number is 26 percent. This is alarming in light of estimates that 30 percent of all homeowners will be underwater within 12 months according to Zillow.com.

Foreclosures hit another record high in June — 1.5 million homes were foreclosed on. The rise in foreclosures, pre-foreclosures and real estate owned by banks presents a huge headwind for home prices.

As Yogi Berra said, “It ain’t over ‘til it’s over.”

cringely Pulse

Mortgage rates were up a little last week, according to Freddie Mac, and house prices seem to be firming a bit according to the Case-Schiller figures for May, which is the most recent month for that housing index.  The Obama Administration is starting to cautiously talk about the recession slowing and maybe even ending later this year.  Does this recovery extend to the housing and mortgage markets. too?

No.

Fewer than half of all mortgage applications are closing.  Fewer than half of the projected four million mortgage modifications will actually happen. That means there are two million or more foreclosures yet to come — an incredible downward pressure on home prices for another 6-12 months.  Case-Schiller futures trading points to a housing low sometime in 2010, which is at least earlier than it appeared to be six months ago, but still not soon enough to validate the Obama optimism, which feels a bit like whistling in the dark.

And all the while mortgages become harder and harder to get.  New appraiser rules are pushing-down appraisal values.  This may be perfectly proper, but it will hurt loan closings.  New mortgage broker rules applied this week need clarification but will generally make loans more, not less, expensive, further driving-down closures.  Loan fees are higher, not lower.

All signs point to a need for further economic stimulus, maybe this time aimed at the people who actually need it (and have been paying for it all along) — American home owners.  We’ll see.

cringely Pulse

Mortgage rates eased slightly higher last week after being down the previous three.  We’ll see this brownian motion in the future, too.  From a policy standpoint, both the government and industry will be grappling this week with the implications of a recent Government Accountability Office report on mortgage modifications and the blow-back from new Fed rules for mortgage brokers.

The GAO report, which came out last Thursday, says what we at Home-Account stated two months ago — that the Obama Administration has no hope of achieving even half of the five million modified mortgages it has been talking about.  The rules took too long to put in place, loan servicers have taken too long to ramp-up to do modifications, and on some level the banks don’t appear to want it at all, even though modifications are clearly in their financial interest compared to the cost of foreclosures.  The upshot that conspicuously ISN’T in the GAO report is that this means an inevitable second spike of foreclosures in the months ahead, further delaying any national housing recovery.

The new Fed rules for brokers are covered in a blog post here at Home-Account, but suffice it to say the Fed is entering new regulatory territory and is unlikely to get the positive results it is seeking.  Where they are seeking greater transparency what the Fed is likely to get are marginally higher mortgage costs for consumers and an overall lower percentage of mortgage applications actually closing.  Great.

cringely Pulse

Mortgage rates were down marginally last week accord to Freddie Mac — the third week in a row for this trend.  What we feel with some certainty is that this week rates aren’t likely to start back up.

Meanwhile the issues of slow refinance activity and glacial mortgage modification rates that we’ve seen for the last several months are being made worse by most of the big banks recently announcing billions in profits.  Remember these are the same banks that were bailed-out with taxpayer money at the same time those taxpayers generally WEREN’T being bailed out.

This may put pressure on the Obama Administration to sweeten the pot for existing mortgage holders, so we expect new initiatives to be announced in the coming weeks.

What those initiatives will include is what we have to figure out by next week.

cringely Pulse

Mortgage rates are continuing to trend down this week, driven both by the bad economy and simple inertia.  Its as though the mortgage industry were waiting for a shoe to drop — and so they are.

The Obama Administration has been subtly reworking its mortgage proposals.  Everything that used to be there is still there, but not to the same scale.  The Public Private Investment Partnership, for example is still in operation and the principle firms were announced this week, but the program that was supposed to buy up to $1 trillion in distressed mortgage securities now looks to be limited to around $30 billion, tops, because of specific limits on buyer leverage.  That’s a more than 97 percent decline in what was supposed to be a key program for mortgage industry recovery.

The Administration has to come up with something else — another program to benefit homeowners — but until then the market waits and waits.  How can it do anything else?  If the new answer is forced principle reductions that’s a HUGE blow the owners of mortgage securities.  Or will Obama have the nerve to even take that path?

Nobody knows.  And so we wait.

cringely Pulse

The Office of the Controller of Currency released some interesting information last week about mortgage modifications and foreclosures.  It seems that modifications, which were supposed to be increasing in number under the Obama Administration’s Making Homes Affordable plan, have actually been dropping since February.  Fewer mortgage holders have been getting mortgage modifications each month and — if that isn’t a dreary enough fact — the overall numbers are pitiful, far less than the millions projected by President Obama.

So the federal mortgage modification program is, in a word, a failure.

Meanwhile, foreclosures continue to rise, but last week brought sobering news on that front, too: the average foreclosure loses the lender 63 percent of the money they have lent on the property.  This is a testament both to the giddy levels of debt homeowners were taken to before the mortgage bubble burst AND to the obvious fact that lenders are losing a ton of money on all those foreclosures.  And right now, according to HUD, 8.9 percent of U.S. mortgages or more than four million mortgages with a notional value of $892 billion are in foreclosure.  If the loss trend for lenders continues, and there is no reason to believe it won’t, that means they face probable losses of more than $560 billion.

This is terrible news, of course, but in a season of terrible news it actually presents an almost humorous paradox, because the Obama (and previously the Bush) Administration doesn’t seem to have met a banker it didn’t like, which suggests that there will be yet another bailout of sorts for the lenders.  But this time around that can only be accomplished, ironically, by doing something for the borrowers, too.

We expect a new Obama program shortly that will somehow reset many mortgages in foreclosure through the simple expedient of lopping some large amount off the principles of those mortgages.  This is an impossible task, of course, because it will simultaneously alienate all the mortgage holders who AREN’T in foreclosure.

Look for such a new program to appear in a few days, with an extra spin cycle thrown in for good measure.

What then?  We haven’t a clue, but it should be interesting to watch.

cringely Pulse

As we predicted two weeks ago mortgage rates are heading down again and, not surprisingly, mortgage and refi applications are heading up.  We’ll be riding this roller-coaster for months to come.

More interestingly, we’re finally starting to see some action from loan servicers on mortgage modifications under the Obama program.  The number of modifications is growing but is still far less than had been predicted and will probably never reach the millions of modifications originally touted by the Obama Administration.  But the most important part of what’s happening is how servicers are applying the Obama rules in actual practice and what result that is having for homeowners.  News on this front is NOT good.

Under the Obama program servicers are required to take mortgage modification applications and associated financial information but they are NOT required to automatically lose a lot of money on every mortgage.  Rather the servicer has to balance the financial impact for the actual owner of the loan of modifying the mortgage versus foreclosing on the property.  Under most circumstances it is better for the lender to modify than to foreclose because foreclosures are expensive.

But the Obama program has a target of making the monthly payment no more than 31 percent of the homeowners CURRENT income.  What if that income is zero?  Then foreclosure makes more sense.  In fact foreclosure makes more economic sense to lenders in cases where there is any substantial reduction of income.  Yet another reason why there are likely to be more foreclosures and fewer modifications to come.

This is likely to get even uglier.

cringely Pulse

cringely Pulse