Back in 1776, John Adams, a member of the Continental Congress, and the future first Vice President and second President of the U.S. wrote, "Each individual of the society has a right to be protected by it in the enjoyment of his life, liberty, and property." Fast forward 234 years later, and today's Congress, in their financial reform package, is taking steps to ensure that homeowners are protected from losing their properties.

The new legislation has provisions for the creation of a Consumer Financial Protection Bureau, which will oversee all aspects of consumer lending. How will the changes that are being discussed affect you if you're planning on doing a mortgage refinance?

Say goodbye to no doc loans

No doc loans, which were used to qualify people for loans that they really couldn't afford, were a huge factor in the mortgage meltdown. Even though these document-free mortgages have been scarce the past few years, Congress is now making sure that they won't be making a resurgence in years to come, even if lending standards become lax. They won't be outlawed-banks will still be able to make them-but they'll be subject to regulations that would make these types of loans extremely expensive to consumers, a discouraging factor, for sure.

Parting with prepayment penalties

When interest rates were rising, many homeowners who had adjustable rates weren't able to keep pace with their rising monthly payments and were forced into foreclosure. Many tried to do a mortgage refinance to replace their adjustable-rate mortgages (ARMs) with fixed-rate loans, but were stopped in their tracks because of steep pre-payment penalties that they were unable to afford. Congress's new reform bill limits prepayment penalties on mortgages, which will ultimately avoid a repeat of this problem for anyone who wants to do a mortgage refinance.

Attending to appraisers

One of the most important responsibilities of the consumer protection agency that will be created pursuant to the legislation is to create new standards for appraisals. This is important so that professional appraisers can act with integrity, and won't succumb to pressure from banks to create inflated property values so that more homes qualify for higher mortgages.

Fixing mortgage broker premiums

Another flaw in the current system is that, in recent years, many mortgage brokers were more focused on their financial wellbeing rather than on the best interests of their clients, and steered them into inappropriate loans that paid them fatter commissions. In the new proposed rules, they'll no longer receive commissions based on the rates and terms of the mortgages. Instead, they'll earn their bonuses from loan amounts, and on the volume of mortgages that they originate.

The words of John Adams were extremely influential in shaping this country's constitution. He can rest in peace knowing that, more than two centuries later, his dreams for individual Americans are still being protected by his successors.

Published on July 19, 2010