In the aftermath of the bursting of the housing bubble—caused by the availability of easy money, speculation and pure greed—the U. S. Department of Housing and Urban Development (HUD) issued new requirements for lenders when they process a mortgage loan for a homebuyer. As of January 1, 2010, lenders must fully inform their client about rates and costs associated with the loan that is being processed.

New HUD regulations went into effect January 1.

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"None of us can lose sight of the fact that millions of Americans simply don't understand all the fine print of their mortgages,” says Brian Montgomery, HUD's assistant secretary of Housing. “And this, in many respects, is at the heart of today's mortgage crisis."

Let's look back at what caused this reaction by the HUD. During the go-go years (2002-2006), borrowers were offered many different types of loan programs. There were “no-documentation” loans where you didn't have to prove what you earned, as well as negative amortization loans that offered a very low interest rate but added to the balance of your loan every month instead of reducing it. There were loans that required a huge payment (balloon) after a few years. There were adjustable rate loans for 2, 3, 5, 7 and 10 years that would bump up in right at the end of the selected time period. It became quite confusing to buyers that were experienced borrowers, much less first-time homebuyers who were getting their first mortgage.

As these adjustable rate mortgages "adjusted” upward, many homebuyers could not afford to make their payments, leading to the recent foreclosure situation the industry now is experiencing. As balloon payments came due and the low introductory rate of the negative amortization loans increased, it pretty well eliminated the ability of many consumers to repay their debt.

In researching the situation, the government found a multitude of problems with the system. First, due to the enormous amount of paperwork that a mortgage entails, consumers found it very difficult to determine what their monthly payment was going to be; did not understand that the attractive initial monthly payment would jump up significantly in a few years; and did not know the costs of the loan until a few days before closing.

The borrowers also didn't know that their mortgage broker or lender's representative was getting a rebate from the bank in the form of a "yield spread premium" (YSP). The YSP is a little bonus the bank gives the broker (it comes out of the interest rate that the homebuyer is paying). In some cases, it’s the total compensation the loan rep earns. In other situations, it’s in addition to the origination fee that is charged.

To help improve the system, HUD has instituted new guidelines. For the first time ever, HUD will require mortgage lender and brokers to provide borrowers with a Good Faith Estimate (GFE). This will be provided to the client three days after all pertinent loan data has been supplied to the lender or broker. The GFE will answer the following:

1. What's the term of the loan?

2. Is the interest rate fixed or can it change?

3. Is there a prepayment penalty?

4. Is there a balloon payment?

5. What are the total costs?

With this information, consumers can now shop other lenders and brokers for a loan with better terms and lower costs. HUD estimates the average consumer can save up to $700 in total closing costs.

"Obviously, more protection for the consumer in mortgage lending has been needed for quite some time,” says Carl Spiteri, partner in San Diego’s ThompsonSpiteri/Benchmark Mortgage. “This legislation is an attempt to clarify fees and bring a level playing field to all lenders. I imagine that once our industry is accustomed to the new disclosure forms, the consumer will be better informed."

There are numerous other aspects in the new regulations. For all the details of the new mortgage rules, click on this link: New HUD regulations.