Last month HUD, the federal Housing and Urban Development agency, proposed an overhaul of the process for obtaining a mortgage. This overhaul would require mortgage brokers and lenders to supply borrowers with a “Good Faith Estimate” and more specific information about the mortgage or refinancing option they are applying for.

According to a HUD press release regarding the proposed overhaul, the new rules would make it easier for potential borrowers to comparison shop and find the least expensive mortgage available to them. It quoted HUD officials as saying that home buyers are not being properly informed about mortgage closing costs and terms.

The press release indicates that the proposed “Good Faith Estimate” included in the overhaul would oblige lending institutions to provide clear, specific details to borrowers on mortgage interest rates, rate adjustability, balloon payments, yield spread premiums, total closing costs, and pre-payment penalties.

The HUD overhaul would also mandate the reading of a “closing script” to mortgage borrowers by the settlement agent. The script would include major terms of the mortgage as well as any difference between the actual closing costs and those indicated in the “Good Faith Estimate”. This would help prevent borrowers from being confused or deceived.

A sample “closing script” supplied by the HUD web site appears to be straightforward and succinct. Other components of the overhaul include capping the amount fees can be adjusted after appearing in the estimate, and giving HUD the ability to penalize lenders or brokers who fail to comply with these new requirements.

HUD has also issued several example closing cost comparison forms, which would be used to indicate the difference between estimated and actual expenses. It appears that the following costs would be permitted to rise no more than ten percent after the estimate: credit reports, flood certifications, tax services, appraisals, mortgage ins., and title insurance.

If successfully enacted, the mortgage overhaul proposed by HUD appears likely to help home buyers more thoroughly understand the terms they are agreeing to, while preventing them from being charged excessive unexpected fees. However, the overhaul may face opposition from lenders and brokers who benefit from misrepresentations or unwarranted fees.

According to the Housing and Urban Development web site, responsibilities of HUD include the prevention of housing discrimination, reselling homes which have been foreclosed upon by the Federal Housing Administration, providing assistance to the homeless, and funding subsidized housing.

The U.S. Department of Housing and Urban Development, or HUD, is a federal government agency which was established in 1965. According to its web site, HUD works to promote community development, improve the availability of non-discriminatory low cost housing, and raise the level of home ownership. It provides various housing related programs and grants to promote these aims. HUD also subsidizes the cost of renting an apartment for some people with disabilities or low levels of income.

The Federal Housing Administration is part of HUD. It offers insurance on mortgages taken out by qualifying individuals, including reverse mortgages for senior home owners. The FHA makes it less difficult for first-time home buyers, people buying homes which need repair, and others to obtain a mortgage. FHA also offers to insure a type of mortgage which includes the costs (up to eight-thousand dollars, depending upon the home’s value) of making a home more energy efficient.

Another division of HUD is the Office of Fair Housing and Equal Opportunity. Its web site indicates that the FHEO works to stop discrimination with regard to housing. Among other activities, it enforces anti-discrimination laws and distributes public service announcements against housing discrimination. Complaints of discrimination can be submitted to them.

Homes can also be purchased from HUD. According to their web site, these are homes which have been foreclosed upon and were insured by the FHA. Because they insure the mortgages, it is their responsibility to sell foreclosed-upon properties. Initially, these properties are only offered to buyers who plan to live in them, but anyone can purchase them after this phase. The separate web sites which list these homes in each state can be found through the HUD site.

HUD works to assist homeless people as well. It helps fund shelters, subsidizes the cost of rent for single rooms the homeless can move into, and supports assistance agencies which offer various services to benefit the homeless. They also operate programs to help veterans who are homeless.

Efforts by the Department to promote community development include various grants and assistance in aiding communities to recover from natural disasters. It helps fund the Youthbuild program, which provides building construction training to young people. The training is applied to create or improve low-income housing.

Other examples of what HUD does include insuring home improvement loans, funding agencies which provide housing counseling, and providing housing-related informational resources.

Freddie Mac and Fannie Mae, two corporations which buy mortgages from lending institutions and sell mortgage-backed investments, have reached a landmark agreement on home appraisal practices with the Office of Federal Housing Enterprise Oversight and the New York state Attorney General. This agreement will bring about measures to help prevent the inaccuracy and conflicts of interest which have occurred with some appraisal practices in recent years.

The text of the twelve-page agreement points out that the present mortgage crisis was partially caused by undesirable appraisal practices. The agreement emphasizes the importance of accurate appraisals to home buyers, lenders, and mortgage purchasing corporations (Freddie Mac, Fannie Mae). It goes on to describe a new “Home Valuation Protection Code” which will be upheld by Fannie Mae and Freddie Mac. The involved entities will also set up an Independent Valuation Protection Institute; this institute will address issues involving inappropriate appraisal practices, and receive relevant complaints from home buyers as well as individual appraisers. Freddie Mac and Fannie Mae will help provide funding for this new institute. The landmark agreement additionally states that the New York Attorney General will drop its investigation of Fannie Mae with regard to appraisal practices.

Both Freddie Mac and Fannie Mae issued press releases about the agreement on March 3rd. The Fannie Mae press release indicates that the Home Valuation Protection Code will go into effect right away, and lending institutions will be required (as of Jan. 2009) to ensure that appraisers have adhered to this Code with regard to mortgages being sold to Fannie Mae. It also states that Fannie Mae will spend a total of $12,000,000 to assist in the establishment of the Independent Valuation Protection Institute. The Freddie Mac press release carried a statement from their Executive Vice President, who praised the Home Valuation Protection Code and efforts to establish the new Institute. He pointed out that the Institute would help promote beneficial home appraisal practices.

Basically, this agreement will bring about efforts by Fannie Mae and Freddie Mac to eliminate problematic appraisal practices which have resulted in appraisals which were not accurate. This should help potential home buyers and companies involved in the mortgage industry to make better-informed decisions. The agreement comes as one among several recent policy changes aimed at eliminating conditions which helped bring about the present mortgage crisis. Other factors which have been partially attributed to it include subprime lending, falsified mortgage applications, deceptive lending practices, price inflation, and minimal down payment requirements.

The Mortgage Forgiveness Debt Relief Act of 2007 was approved by the U.S. Congress and President Bush in December. It is aimed at preventing home owners from having to pay taxes on forgiven debt when their homes are refinanced or foreclosed upon. Other measures altering various tax laws are included in this legislation as well. Read on to learn more about what the Mortgage Forgiveness Act entails…

When a home is foreclosed upon or a lending institution forgives part of the debt (this may occur if the home’s value drops and the owner sells it for less than he or she owes on a mortgage), the tax law normally treats the debt home owners no longer owe as “income” and taxes them on it. According to house.gov, the Mortgage Forgiveness Act was introduced in response to the crisis involving subprime mortgages, and it quoted Congressman Rangel as saying that foreclosed-upon home owners shouldn’t have to pay a large amount of taxes. After signing the Mortgage Forgiveness Act into effect, the president called for Congress to take additional housing-related steps with regard to Fannie Mae, Freddie Mac, the Federal Housing Administration, and tax-free bonds to assist property owners in refinancing their mortgages.

However, the Mortgage Forgiveness Act will not permanently remain in effect. As indicated by whitehouse.gov, taxes on forgiven debt are only eliminated for a period of three years. The legislation also incorporates some additional changes which have received less attention. Its text (available on the Library of Congress web site) indicates that the cost of Private Mortgage Insurance (PMI) will continue to be treated the same way as interest by the Internal Revenue Service until the end of 2010; thus, it will remain tax-deductible. It also includes some changes to the tax code with regard to the taxation of emergency personnel, the sale of homes owned by people after their spouses pass away, and fines for businesses which do not file tax returns on time.

Basically, the Mortgage Forgiveness Act will prevent the IRS from penalizing home owners who have been foreclosed upon or had part of their debt forgiven by a bank. This, along with its extension of the tax deduction for PMI, will decrease the burden on home owners during the current subprime mortgage crisis and economic downturn. It will also make it less difficult for people who have lost their homes to recover financially.

The mortgage crisis which currently afflicts the U.S. economy has brought about numerous foreclosures, corporate bankruptcies, and job layoffs. There is no one answer as to who or what caused this crisis; it was brought about by a combination of several factors. First, we should start with how and when it began, to see what actually caused it to occur.

With the real estate “boom” underway, home prices were constantly rising, and sales remained brisk. Owners realized that they could “flip” (quickly re-sell) their homes at higher prices, rapidly moving from one to the next. Low fuel and food costs helped spur these real estate sales, convincing buyers that they could afford to live in increasingly more expensive homes, without the slightest sacrifice in their standard of living.

Buyers, mortgage brokers, and lending institutions all realized that “flipping” made it possible for homes to be purchased and temporarily owned by people with insufficient incomes to pay for them. Some brokers encouraged people to put false income data on their mortgage applications, while small lenders defrauded larger banks into purchasing mortgages from them based on falsified applications. This sort of mortgage activity would have caused a crisis earlier, if it had not been for the continuing rapid home sales.

With the mortgage industry having been deregulated by the government years earlier, some were taking a more “creative” approach to lending. The unrealistic technique of offering high-interest “subprime” loans to people with poor credit histories became quite common, with many brokers and lenders employing dishonest tactics to deceive buyers about them. At the time, ever-rising home prices made it possible for lending institutions to easily resell (at a higher price) any homes that did get foreclosed upon.

When real estate sales sharply declined and prices began to drop, the “bubble” burst and owners were unable to escape the current home (and mortgage) they had intended upon “flipping.” The monthly payments on many of their adjustable mortgages went up, and increasing fuel costs caused the price of consumer goods to rise. As many of them became unable to make the payments, and banks could no longer find buyers for foreclosed-upon properties, the mortgage crisis began.

Basically, the current mortgage crisis was caused by the unsound financial decisions of many lending institutions, brokers, and home owners who based their actions upon the formerly-booming real estate market. The crisis was also caused by the government’s failure to properly regulate the mortgage industry, and the questionable economic theory of giving high-interest loans to people with problematic credit records.

The House Judiciary Committee of the U.S. Congress recently approved a bill regarding mortgages and bankruptcy. The legislation (H.R. 3609) would enable homeowners with some mortgage types, including subprime and interest-only, to gain more favorable mortgage repayment terms as part of a chapter 13 bankruptcy.

According to a press release issued by Congress member Linda Sanchez’s office, the mortgage bankruptcy bill is intended to provide “relief” to homeowners affected by the crisis involving subprime and other unconventional loans. It was co-sponsored by Sanchez and North Carolina congressman Brad Miller. The bill applies to non-traditional mortgages which were initiated during the time between 2000 and the date when the bill comes into effect, if it is passed.

Sanchez was quoted as saying that the bill would provide assistance to “hundreds of thousands of families” at risk of having their homes foreclosed upon. However, she also stated that the bill incorporates “safeguards” designed to prevent it from benefiting those who simply bought a home which was more expensive than they could afford.

The press release indicates that this mortgage bankruptcy bill, if passed by Congress, would allow bankruptcy judges involved in chapter 13 bankruptcy cases to extend repayment periods, change the mortgage principal to be the same as the home’s true value, decrease excessive interest rates, and take other measures to enable continued home ownership by people with subprime and other unconventional mortgage types.

Chapter 13 is a type of bankruptcy which helps income earning individuals who are having difficulty making payments to repay some or all of their debts. According to uscourts.gov, chapter 13 cases involve arranging installment payments over a period of three to five years. It indicates that, in cases involving a mortgage, this can enable people to keep their homes, but they will still have to afford each of the mortgage payments under the new payment arrangement by the date at which they are due.

Overall, the mortgage bankruptcy bill in Congress would help home owners with unconventional mortgages who are facing bankruptcy to potentially avert foreclosure, by obtaining more reasonable mortgage payment terms. However, it will have to be approved by the full Congress and the President before it can take effect.

Subprime loans, which offer higher interest rates to home buyers with poor credit records, have come under increasing scrutiny in recent months due to high foreclosure rates and deceptive practices applied by some lenders.

Freddie Mac and Fannie Mae are two corporations which were created by the U.S. federal government decades ago, but are now owned by share holders. They play an important role in the mortgage industry which impacts home buyers, lending institutions, and investors.

Freddie Mac was created decades after Fannie Mae came into existence. According to FreddieMac.com, the company’s goals were defined by the U.S. Congress in 1970; they include the expansion of affordable housing and making sure that lenders have sufficient money to issue low interest mortgage loans. The web site states that Freddie Mac doesn’t directly issue mortgage loans to homeowners. Instead, it buys mortgages from lending institutions which want to sell them; this provides lenders with more money and allows them to make additional loans. Then it earns money from interest paid on the mortgage, as the original lender would if they had retained possession of the loan. It goes on to use the mortgages as a basis for selling “mortgage-backed securities” to investors. The company also takes measures to educate potential home buyers about mortgages and home-buying in general, including informational sections on its web site and free workshops which are held across the nation. Freddie Mac is another name for the Federal Home Loan Mortgage Corporation.

Fannie Mae, or Federal National Mortgage Association, was formed in 1938. The Fannie Mae web site indicates that it was originally a government agency, but became a separate corporation in 1968. The goals stated by its web site are much the same as those of Freddie Mac. It indicates that Fannie Mae works with over one-thousand lending institutions in the United States. It is based in Washington, D.C. unlike Freddie Mac, which is headquartered in Virginia. Both corporations have a limit ($417,000 dollars in the continental U.S., as of 2007/2008) of how large a mortgage they are willing to purchase from lenders. This contributes to the higher interest rate on mortgages for more expensive homes, as banks aren’t able to sell them to Fannie Mae or Freddie Mac. Fannie Mae also makes charitable contributions aimed at eliminating homelessness and promoting the expansion of home ownership.

Basically, Freddie Mac and Fannie Mae perform a similar role in the economy, which benefits both lending institutions and mortgage borrowers. They help lenders gain revenue from mortgages more quickly, and enable home buyers to have greater access to new mortgage loans.

During the past year, some states have enacted or scheduled the introduction of new regulations which apply to mortgage brokers. These have included Colorado, Massachusetts, and Alaska. Such regulations have focused on eliminating deceptive practices and requiring brokers to become registered with the government. It is also possible that additional regulations will be introduced at the federal level.

Most recently, in mid-October, the Attorney General of Massachusetts issued new regulations of this type. According to a press release issued by the Attorney General’s office on the 17th, the new regulations prohibit some types of broker and lender practices which are considered to be deceptive or unfair. Expanded regulations which apply to mortgage brokers include the prohibition of initiating a loan for which the broker does not have a “reasonable belief” the borrower will be able to repay it, and the requirement of greater disclosure by the broker regarding “no doc” and “stated income” loans. The new laws also ban brokers from brokering mortgages which are “not in the borrower’s interest” or in which the interests of the borrower and broker are conflicted.

Much earlier in the year, the state of Colorado enacted new regulations applying to mortgage brokers and required many of them (with some exceptions) to complete a process to become registered as a broker. The Rocky Mountain News published an article on the subject in January, indicating that the new law requires FBI and CBI criminal investigations, fingerprinting, a two-hundred dollar registration fee, and other requirements before someone can become registered as a mortgage broker.

The state of Alaska will bring about new mortgage broker regulations in July, 2008. According to the official State of Alaska web site, brokers and lenders will be required to become licensed and meet various requirements to do so; among other changes, a fund (supplied by lenders) will be established to help provide compensation to borrowers who fall victim to mortgage lending activities considered not to be ethical and/or legal.

New regulations are also possible in the federal government; according to an Associated Press report in late October, the Office of Thrift Supervision’s director spoke of the need for national broker registration and license requirements, so that dishonest brokers would not be able to relocate from one state to the next and continue their unethical practices. The recent sub-prime mortgage crisis, along with the related foreclosures and bankruptcies, seems likely to spur additional regulation in this field.

With the decreasing number of home sales and the ongoing subprime mortgage foreclosure crisis, some corporations in the mortgage industry have enacted major layoffs of their employees in recent weeks and months. Bankruptcies and layoffs in related industry sectors have also occurred because of this situation.

Multiple layoffs have been announced by this industry just in the past week (as of 09/13/07); the Sydney Morning Herald reported on the 10th that the mortgage lender Countrywide Financial would eliminate twelve-thousand jobs in the coming months. The Reuters news agency reported that Lehman Brothers Holdings and National City Corp plan to carry out layoffs of over twenty-one hundred employees, and the Kansas City Star published a news story indicating that H&R Block announced its intention to cut nearly six-hundred additional jobs at its subsidiary, Option One Mortgage Corporation.

Many mortgage industry layoffs occurred in August as well. Reuters reported on August 17th that NovaStar Financial, which issues subprime mortgage loans, cut its work force by thirty-seven percent (approximately 500 workers), and indicated that 35,752 jobs were cut in the financial sector during August (more than had been lost in a single month for at least fourteen years). The Arizona Republic newspaper published a news report in late August stating that 1st National Bank Holding Company (based in Arizona) had announced layoffs of 541 employees. Other sources reported layoffs at additional companies in the mortgage industry, including GreenPoint Mortgage, IndyMac Bancorp, and Accredited Home Lenders.

Fewer new mortgages are being initiated for various reasons, contributing to these layoffs; home sales are decreasing, lenders are applying greater scrutiny to mortgage applicants, and the availability of subprime rate loans is being cut back. Fewer employees are now needed to process the new mortgages. Some mortgage industry companies have even filed for bankruptcy. According to the Baltimore Sun newspaper, about sixteen lenders have gone bankrupt from December, 2006 through September, 2007. The economic situation has also brought about layoffs in the construction industry and other real estate related sectors.

Mortgage industry layoffs are likely to continue as long as the housing market remains weak. It remains to be seen whether or not it will be possible for the quantity of mortgages to increase again, despite stricter credit history requirements being applied to potential borrowers. With the many foreclosures occurring due to questionable subprime rate loans, the amount of mortgages being issued (and thus the number of people employed) by this industry may have been unrealistic and unsustainable.

The pending home sales index has fallen to the lowest level it has seen since the September 11 terrorist attacks due to the recent mortgage market meltdown. This comes as a quite a shock to most economists, who were looking for about a 2% decline and instead saw a whopping 12.2% fall.

However, others say the drop was to be expected given that the mortgage market has been experiencing disruptions that haven’t been seen since 9/11.

Rising delinquencies and defaults in July and August created difficulties in mortgage backed securities sales and many lenders left the mortgage market completely because of it.

Still, Realtors remain hopeful, believing that the problems are temporary and that the majority of buyers don’t face the financing problem because they qualify for conventional financing, rather than subprime loans. They are focusing on the fact that the market has been somewhat stable since mid-August.

Unfortunately, Mike Larson, real estate analyst for independent research firm Weiss Research said the fact that the mortgage market went from bad to worse from July to August suggests that the next pending home sales report could be worse still, and that there is problems ahead for other home sales measures, such as the even more closely watched existing home sales report. “We have these issues with mortgage credit that started to hit in July, but they gathered steam into August,” he said. “This housing downturn is not just a one-month event.”