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New Fed Rule Could Reduce Foreclosure Prices

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The federal government has proposed new rules that would significantly limit mortgage loan origination fees and possibly result in reduced foreclosure prices.

Today when borrowers seek a new mortgage they typically pay a 1 percent origination fee at closing. If you borrow $100,000, then the fee is $1,000. If you borrow $200,000, the fee rises to $2,000. The origination fee is in addition to any "point" or "loan discount fee" charged by the lender to reduce the interest rate.

The Consumer Financial Protection Bureau says origination fees are unfair because the paperwork associated with processing a mortgage is the same regardless of the amount borrowed. Under the proposed rule lenders could only charge flat upfront fees that do not varying with loan size.

Flat Origination Fee for Mortgage Loans

If the origination fee is flat regardless of mortgage loan size then lenders would have to institute a set charge no matter how big or small the mortgage. If the fee is $2,000 that means when compared with today the borrower who wants a $200,000 mortgage would have the same cost, the borrower with a $300,000 mortgage would pay less and the borrower with a $100,000 mortgage would pay twice as much current fee.

Lenders can set the flat fee at any price. Consumers could then consider the origination fee along with the rate and points when shopping for a loan.

Short Sales & Foreclosures

For short sale and foreclosure borrowers the new rules — if they go to effect — could have two results.

First, some traditional lenders might conclude that with the new mortgage rules the  home lending business has insufficient potential and a lot of liability. The result could be a decision to exit part or even all of the mortgage business. That could mean selling off mortgage units, reducing origination activity,  dumping large numbers of REOs (real estate owned by lenders) and accepting short sale terms that may not have been available previously. Remaining lenders will try to fill the origination void left by the departing players.

Can't  happen? Consider that several major lenders have already left the FHA reverse mortgage business even though such loans are 100 percent guaranteed by the federal government.

Second, a foreclosure and short sale surge would pressure home prices downward and create more opportunities for value buyers — and more woes for sellers.

Opposition to the flat fee proposal will be enormous so the likelihood of enactment is uncertain if not doubtful. But stay tuned — this is one mortgage debate with real impact on the housing game regardless of which side wins.

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