New ‘know before you owe’ mortgage rules may ease homebuyers’ burden

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• HARI SREENIVASAN, PBS NEWSHOUR WEEKEND ANCHOR:

  New rules for home mortgages designed to make lenders be more transparent in disclosing their terms to borrowers. Those rules took effect today.

  The so-called Know Before You Owe rules are meant to protect homebuyers from surprises at their closing and committing to payments they don't understand.

  Wall Street Journal reporter Joe Light is covering the issue and joins me now to discuss the new rules.

  This is part and parcel of the response to the housing crisis, the financial crisis, people just complaining that "I don't know what I got into" or "I didn't know what I signed."

  Why did it take so long for these rules to get here?

• JOE LIGHT, WALL STREET JOURNAL REPORTER:

  Well, that's a really good question. I mean, so a few things happened. The law was passed way back in 2010 as part of the Dodd-Frank Wall Street reform.

  And the reform basically called on this new agency that hadn't even been created yet called the Consumer Financial Protection Bureau to design simplified forms that would make it easier for consumers to understand basically what they were getting into when they made, you know, what is often the biggest financial purchase of somebody's life.

  So the CFPB, they designed the forms, they went through four years of testing the forms. And then once they gave them to lenders, they told them it's time to implement this.

  And mortgage lenders say this has been a huge technological challenge for them. It's taken them thousands of man hours, huge swaths of employees devoted to only this project.

  And now finally we're getting to the point where lenders say that they think they're ready and it's time for this big change-over to happen.

• HARI SREENIVASAN:

  So if you're going to get into a mortgage transaction, what is the average consumer likely to see as a difference because of these rules?

• JOE LIGHT:

  So there are two big changes. One, the forms you get right after you make a mortgage application and the form you get right before closing is going to be simplified.

  The terms are supposed to be easier to understand. You're supposed to understand if you have an adjustable rate, and the rate will go higher after a certain number of years.

  You're not supposed to be surprised if, you know, 10 years from now you have some sort of balloon payment on a mortgage or anything like that. So, that's the first change.

  The second change is before – before closing, you're supposed to get these documents at least three business days before closing.

  And that's designed so you have time to understand what you're getting into before you sign on the dotted line.

  Now, it seems to make sense, but if you make any changes within that three-day window – so if you decide you want to switch, say, a fixed-rate mortgage to an adjustable-rate mortgage, that resets the three days.

  As for people who are trying to, you know, closely time home closings, resetting that three-day window can lead to some headaches.

• HARI SREENIVASAN:

  Right, because usually people are trying to sell a home and buy a home at the same time.

  So if one transaction gets delayed, then it has kind of a ripple effect on other ones, right?

  So how are they going to know if these rules have helped consumers?

• JOE LIGHT:

  I guess we're not really going to know until the next financial crisis hits, right?

  And then we'll see whether the consumers who are able or unable to pay their loans, you know, feel like they knew what they were getting into.

  I mean, just as people didn't really know that people didn't really understand mortgages this past time around, until that financial crisis actually hit, we might not know whether these new forms really were effective until later.

  The thing to watch out for the next couple of months, though, is whether the real estate industry is ready.

  The real estate industry has gone, as I said, it's gone through this huge technological change-over.

  Everything has to change over, you know, literally over this weekend and be ready on Monday.

  So what's going to happen over the next few months is we'll see whether or not home closings are happening on time or whether, you know, some of these mortgage lenders or real estate agents weren't actually ready and we see a lot of closing delays.

• HARI SREENIVASAN:

  All right. Joe Light of the Wall Street Journal. Thanks so much for joining us.

• JOE LIGHT:

  Thanks.