New law could have impact on borrowers, homeowners

The new Consumer Protection Act cracks down on lenders, but also will make it harder for some borrowers to get a mortgage.

Q. I have read a lot about how the new Consumer Protection Act is supposed to help credit-card users, but I haven't seen anything about how it might affect mortgage borrowers. Will it?A. Yes. In fact, some analysts believe that the most immediate impact of the newly signed bill will be on the nation's mortgage and real estate markets.I have received several letters from readers asking about the new law, which President Barack Obama signed in late July, so I'm devoting this entire column to answering some typical questions. It may sound odd, but here's one of the biggest changes: Lenders will now have to verify that a mortgage borrower actually can pay the money back. Banks formerly were allowed to follow much looser underwriting requirements that let some consumers get a loan that they couldn't really afford, and this later helped to create the current wave of foreclosures and subsequently the federal government's long string of multibillion-dollar bailouts of several financial institutions.Lenders can now be financially punished if they don't scour a borrower's application, income and credit history.I got screwed by a mortgage broker, who lied to me and steered me into a really bad loan with a high interest rate and very high costs when I refinanced a few years ago. Will the new law do anything to put lousy brokers out of business?A. Bad brokers have been around as long as the mortgage industry itself. The Consumer Protection Act won't eliminate the problem, but it includes some provisions that should help borrowers who work with a broker to get the best deal possible.In the past, brokers could collect extra income from a bank by making certain types of loans - even if the loan carried a higher rate or other onerous terms that the borrower didn't deserve to pay. The new law aims to end that practice by prohibiting lenders from paying bonuses to mortgage brokers based on a loan's interest rate or other costs. Borrowers should benefit because brokers will no longer have a financial incentive to push them into lousy, high-risk mortgages.I heard that the new law makes adjustable-rate mortgages illegal. Does it?A. No, ARMs still will be available. However, some technical changes in the act will encourage lenders to make more plain-vanilla 30-year loans with fixed interest rates rather than those with an adjustable rate that can skyrocket in the future. That's good, because it should help reduce the number of future foreclosures, but it could hurt home sales and prices in high-priced markets where adjustables with low introductory rates and small down payments are the only type of loans that many potential buyers can afford.In several ways, the new law simply will strengthen trends that began taking hold in the mortgage industry in the past year. Those infamous "no-money-down" loans, which already are hard to find, will virtually disappear. Future borrowers should expect to make a minimum 5 percent or 10 percent down payment if they want to buy a relatively modest home: More lenders will demand at least 15 percent down for larger mortgages.Will the Consumer Protection Act help or hurt a person's credit score?A. The act doesn't have any specific language concerning the way that credit scores are calculated, but other provisions aimed at encouraging lenders to make "foreclosure safe" loans will make it harder for those with a marginal credit rating to obtain a mortgage.Fannie Mae and Freddie Mac, the pair of quasi-government agencies that helps to set lending standards but recently got federal bailouts of their own, will no longer purchase loans from banks if the applicant's credit score is below 620. The best rate will be reserved for those with a rating of 720 or higher, analysts say.Restrictions for getting a low-down-payment loan backed by the government's own Federal Housing Administration also are getting tighter. The FHA technically requires a credit score of only 580 to get a loan with a down payment of about 5 percent, but some lenders that actually issue the mortgages are now demanding a minimum score of 670. And if you're purchasing the home with a spouse or someone else, the lender likely will base its rate on the lower of the two scores.bull; For a copy of the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960#169; 2010, Cowles Syndicate Inc.