Like a tsunami, the mortgage crisis built slowly beneath the surface, out of sight until the moment it washed over the shore, a 50-foot wall of water and disaster. To be sure, there were warnings, but many went unheeded and, by the time the reality sunk in, it was too late. The mortgage industry as we know it was engulfed in a catastrophe.

In an effort to address the subprime mortgage crisis and the widespread fraud that accompanied it, the federal government has taken several actions over the past few months to overhaul mortgage industry regulations and restore confidence. The changes are designed to help stabilize what has become a very volatile situation, one that is spilling like a dangerous wave into every aspect of the domestic economy and even affecting global markets.

As a whole, mortgage professionals welcome the change. Right now credit is so tight and confidence so low that money isn’t flowing through businesses. Like ripples from a stone tossed into the water, the impact is moving from mortgages, to appraisers, to title companies, all the way to manufacturers. Everything is being affected. More market stability and confidence in the market is what everyone is looking for from the new regulations.

The recent passage of the $700 billion Housing Economic and Recovery Act of 2008 rescue package (HERA) was intended to restore confidence in Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBs). This legislation strengthened regulations, placed Fannie Mae and Freddie Mac under the direction of the federal government, and created a new FHA program designed to help families avoid foreclosure by letting them refinance into more affordable mortgages. Some of the key changes from that legislation include: The HOPE for Homeowners Act of 2008—This new, temporary FHA program will make it possible for some homeowners who are at risk of foreclosure to get into more affordable, 30-year, fixed-rate loans. Ef-fective October 1, 2008 through September 30, 2011, the FHA will insure loans for lenders who voluntarily write down loan balances to at least 90 percent of the property’s current value. Although investors and lenders will have to take losses to benefit from this new program, the losses will be far less than those that would result from foreclosure. Homeowners who sell their house after refinancing will have to split the equity earnings with the FHA, on a sliding scale basis.

By keeping families in their homes and stabilizing local housing markets, the FHA hopes to restore confidence. The uncertainty that has led to a virtual chokehold on lending and economic growth is expected to ease, as banks and other financial institutions are better able to determine the value of their subprime mortgages and related securities.

Secure and Fair Enforcement (SAFE) for Mortgage Licensing Act—Because many homeowners who are now in danger of foreclosure were victims of misleading or fraudulent lending practices, the SAFE Mort-gage Licensing Act establishes a nationwide loan originator licensing and registration system.
SAFE sets minimum standards for anyone involved in the origination of a residential mortgage, including mortgage brokers, loan officers, mortgage bank loan originators, financial services companies and agents, and depository institution loan officers. Although states have until August 1, 2009, to implement SAFE, state regulators in every state are already holding meetings to determine the best way to put the program into practice. Existing state laws that provide greater protection for the consumer are not preempted by SAFE.

Most people in the industry feel this is exactly what is needed. Those who are in mortgage lending for the long haul, who really care about their customers and the products they provide, are happy with the changes. The new minimum standards for licensing and registration as a loan originator include:

• Never having a loan originator license revoked in any state.

• No felony conviction or guilty plea during the past seven years or at any time, if the felony involved an act of fraud, dishonesty, breach of trust, or money laundering.

• Demonstrated financial responsibility, good character, and general fitness to command the confidence of the community.

• Fingerprinting for an FBI criminal history background check.

• At least 20 hours of pre-licensing education, which would include three hours of federal law and regulations, three hours of ethics, and two hours of standards for non-traditional lending.

• Pass a written pre-licensing test.

• Meet either a net worth or surety bond requirement, or pay into a State fund.

Not only must each licensee continue to meet these minimum standards in order to renew their license each year, but they must also complete at least eight hours of continuing education. This would include three hours of Federal law and regulations, two hours of ethics, and two hours of standards for non-traditional lending.

FHA Modernization Act of 2008—In an effort to ensure that safe, fixed-rate FHA mortgages are available to more families, FHA reform is included in the HERA act. Such reform is intended to modernize, streamline and expand the FHA program.

Many felt that the economic stimulus plan that was passed in March 2008 was a short-term repair. With this latest legislation, the necessary long-term fix is in place. Up to now, FHA loan limits weren’t keeping up with the times, and many customers couldn’t qualify for FHA loans be-cause home prices in their area were too high. Additionally, because FHA loans were difficult to originate and understand, loan originators often put customers into other products. Other aspects of this legislation include:

• Effective January 1, 2009, loan limits increase from 95 percent to 115 percent of area median home price, to a maximum of 150 percent of the GSE limit ($625,000).

• A 3.5 percent down payment is required.

• Down payment assistance by sellers is no longer allowed, although down payment assistance from family members is permitted.

• A one-year moratorium has been placed on HUD implementation of risk-based premiums.

The Housing Assistance Tax Act of 2008—Because of the severe impact the housing market crisis is having on the economy, this act was created to provide $15.1 billion in tax incentives for homebuyers. It includes several important changes including:

• A tax credit of up to $7,500 for first-time buyers, to be repaid over 15 years. In essence, this is a no-interest loan.

• For 2008 only, homeowners who don’t itemize can claim an additional property tax deduction of $500, $1,000 for joint filers. This is in addition to their standard deduction.

• Capital gains exclusions for the sale of a home will be prorated based on the percentage of time the house was used as a primary residence.

Home Appraisers Come Under New Regulation
A major contributing factor to the mortgage crisis can be traced back to the large number of intentional overvaluations on home appraisals. As a result of this flood of faulty appraisals, new standards have been put into place for appraisers.

Beginning January 1, 2009, mortgage brokers will no longer be able to order appraisals; the job will be done by a disinterested third-party whose compensation isn’t tied to the origination of that loan. Appraisers will be chosen from a pool, eliminating the ability of brokers to handpick appraisers. Furthermore, lenders with in-house appraisal teams or interests in financial appraisal firms will no longer be allowed to use valuations done by that team if they want to sell the loans on the secondary market.

Home Ownership & Equity Protection Act Amended
In mid-July, the Federal Reserve took action to amend the Truth in Lending Act in order to better protect consumers from unfair and deceptive practices during the mortgage application process. The new rules go into effect October 1, 2009, and apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. The following protections will be provided for a newly defined category of “higher-priced mortgage loans”:

• Lenders must take into consideration the borrower’s ability to repay the loan from income and assets. They are prohibited from making a loan based solely on the home’s value.

• Income and assets used to determine repayment ability must be verified.

• Prepayment penalties are banned if the payment can change in the first four years. For other higher-priced loans, a prepayment penalty cannot last more than two years.

• Escrow accounts for property taxes and homeowner’s insurance are required for all first-lien mortgage loans.

• A good faith estimate of loan costs, including a schedule of payments, must be provided within three days after a consumer applies for any mortgage loan secured by their principal residence.

• Creditors and mortgage brokers are prohibited from coercing appraisers to misstate a home’s value.

In the wake of the mortgage tsunami, every aspect of the lending industry is facing additional oversight. Although many regulations were already in place, they have now been expanded into much greater detail. Many believe the biggest culprit wasn’t that there weren’t regulations, but that the industry was doing so well, no one was really policing it.

For consumers, many of whom have been left holding mortgages they can’t pay, for homes they pro-bably shouldn’t have purchased in the first place, it’s good news. For lenders, it’s good news, too. These new regulations not only address current problems, but are designed to ensure the events of the past couple of years won’t happen again and that another tsunami isn’t building beneath the waves, waiting to strike when we least expect it. That knowledge alone should go a long way to help restore confidence in the market.