New year means new mortgage rules, new opportunities
By Michael D. Larson • Bankrate.com

Resolutions. Champagne toasts. Updated mortgage rules. Yep, Americans have all kinds of exciting things to look forward to after midnight Dec. 31.

In the mortgage industry, new guidelines, which alter the prices that lenders charge, take effect at the beginning of January.

There could be broader changes in store for borrowers next year, too. Industry lobbyists and consumer groups have a full plate of mortgage-reform proposals they want the new Congress to address once it convenes Jan. 3. And with interest rates coming down, lender offices should be much busier in 2001, as well.

"If we can look to history -- and this goes back probably if we look back over the last 10 or more presidents -- typically a president is most effective in getting his agenda adopted by Congress in his first year in office," says Sam Wright, senior vice president for government relations at New York-based Cendant Corp. The company owns a mortgage-making division and provides franchising support to real estate brokers operating Century 21 and Coldwell Banker offices.

"Going by that trend, 2001, beginning of 2002, should be an extremely busy legislative session on all issues."

Adds Bud Carter, senior director of residential finance at the Mortgage Bankers Association of America: "2001 will be just about as busy as the last couple years. It's always driven by interest rates, but it looks like interest rates have come down a little bit the last few months, and if they stay on that trend, it's going to be a busy year."

Regardless of how things play out, certain changes will take effect in the mortgage industry Jan. 1, just as they have for many years.

Fannie and Freddie get a massage
One of the most important events for consumers is the annual adjustment of Fannie Mae and Freddie Mac loan limits. The two agencies purchase loans from lenders. But by law, they can't buy mortgages that exceed a certain dollar amount. Loans that fit under the cap are called "conventional" or "conforming" mortgages, while those that don't are called "jumbo" loans.

The limit adjusts every Jan. 1 based on the results of an October Federal Housing Finance Board survey that measures year-over-year changes in home prices. Since 1980, the agencies have raised their loan caps 17 times because prices rose, kept them steady twice in the mid-1990s and reduced them just once -- between 1989 and 1990. This time around, the conforming loan limit is jumping 8.8 percent to $275,000. That's the largest annual increase in 12 years.

"Demand for homeownership, a good economy and the low interest rates are still pushing house prices up," Carter says.

Borrowers be ready
So what should borrowers do to avoid problems associated with the revision? Say a couple wanted to buy a $340,000 house with a 20-percent down payment. They would need a mortgage for $272,000. If they went out today in search of a loan, however, they would likely need a jumbo one because Fannie Mae and Freddie Mac won't buy mortgages for more than $252,700 until next year.

Unfortunately, jumbo loans are more expensive than conventional ones. The average 30-year fixed-rate jumbo loan was 7.69 percent on Dec. 20, while the average conforming loan was 7.25 percent, according to Bankrate.com data.As a result, the couple would end up having to pay almost $81 more a month for principal and interest if they got a loan now. Assuming they made no prepayments, their loan would cost them just over $29,468 more in interest, too.

Some lenders jump the gun each year and make loans for formerly jumbo amounts at conforming rates, but most won't until the first of the year, experts say. Borrowers should therefore wait until Jan. 1 to draw up any loan documents if they need to borrow more than this year's limit but less than next year's.

Loan limits aren't the only things that will change at the stroke of midnight either.

FHA fee-fall
The Department of Housing and Urban Development recently announced it will cut the fees associated with Federal Housing Administration, or FHA, loans as of Jan. 1. To avoid paying unnecessary charges, potential FHA customers should therefore wait until the new year to borrow.

Plenty of other changes could be on tap for consumers in 2001, too, depending on what regulators and legislators accomplish. The Federal Reserve Board, which enforces the Home Ownership and Equity Protection Act, recently proposed strengthening the law's consumer protection provisions, for example.

HOEPA currently prevents lenders from making mortgages based solely on a borrower's equity and from charging most types of prepayment penalties, among other things. But the law applies only to loans with excessively high rates or fees. The Fed proposals will lower the rate threshold so more loans would be subject to HOEPA restrictions, while lengthening the list of restricted lender practices.

Powering the people
Congress could pass legislation that goes even further to prevent so-called "predatory lending," according to some observers. Laws giving borrowers the right to obtain their credit scores and authorizing FHA to offer hybrid adjustable-rate mortgages may be on the table, as well.

This year, California enacted legislation giving people in that state access to their scores under certain conditions, though FHA proponents failed to get approval for a promising ARM bill.

"There's going to be a focus there with regard to mortgage inititatives," says Gary Weaver, managing director of public policy for the National Association of Realtors. "You've got a number of issues there that are on the table for addressing -- predatory lending, affordable housing and credit scoring, to name a few. From our standpoint, we're very much looking forward to working with Congress and educating members on the importance of addressing these issues."

Mortgage groups would also like to see a long-stalled push for comprehensive mortgage reform pick up steam again next year. They want changes in federal law that would allow them to provide exact closing cost figures early on in the mortgage process, among other things.

"A lot of the success for President Bush's legislative agenda, which we hope will include some attention to mortgages, will be his ability to do what he said the other night -- reach out to bipartisan support, compromise and what have you," says Cendant's Wright.

"If he's successful in doing that, I think this can be a very active season. If he's not able to do that, I think we're going to have probably several more years of partisan wrangling where little, if anything, will get done."