Preventing the dream of homeownership from becoming a nightmare

OLYMPIA – The Legislature is hard at work to prevent middle-class Washingtonians’ dreams of homeownership from becoming nightmares.

Today, the Senate passed significant legislation to regulate the mortgage broker industry, which generates about seventy percent of home loans today.

Last fall, the Governor’s Homeowner Security Task Force analyzed the national mortgage crisis and made recommendations for protecting our citizens. Senate Bill 6272, which passed the Senate the first week of session, addressed the task force’s recommendations to provide more financial literacy education and counseling for new homebuyers and homeowners facing foreclosure.

Senate Bill 6728 addresses the remaining task force recommendations regarding responsible mortgage lending and homeownership by calling for full financial disclosure from lenders, no prepayment penalties for refinancing, clearer language in foreclosure notices, and increased protections against lending and foreclosure scams.

“Buying a home for most people can be a stressful time with massive loan documents that are confusing and may have hidden or undisclosed terms and fees,” said Sen. Jean Berkey, D-Everett, who sponsored both SB 6272 and SB 6728. “This legislation helps homebuyers choose the right lender and understand the commitment they are making.”

SB 6728 passed the Senate on a unanimous vote.

The Senate also passed Senate Bill 6381 to impose a fiduciary duty on mortgage brokers. Fiduciary duty, simply put, is the legal responsibility for the mortgage broker to act in the best interest of the borrower – the same legal duty financial advisers, accountants and trustees owe to their clients.

“At the peak of the subprime boom, a study published in the Wall Street Journal found that over half of the borrowers in subprime mortgages actually qualified for prime loans,” said Sen. Brian Weinstein, D-Mercer Island, the bill’s sponsor. “Brokers put borrowers in a higher rate because they make more money that way. Despite what borrowers believe, brokers are not always working in their best interest. This bill just codifies borrowers’ expectations into law. But most of all, it helps consumers make informed financial choices.”

SB 6381 passed on a 29 to 19 vote.

To further help prospective homebuyers make informed choices, the Senate passed legislation requiring broader disclosure of home loan fees and terms.

Mortgage brokers earn their money from borrowers by building a fee into the interest rate offered by a lender to a homebuyer. This fee is known as a yield spread premium (YSP) and most homebuyers are not aware of the affect it has on their loan.

Senate Bill 6452, sponsored by Sen. Rodney Tom, D-Bellevue, requires mortgage brokers to fully disclose the amount of the YSP they will receive on a loan, along with other fees and terms of the loan that may not be obvious to homebuyers.

The bill does not ban YSPs.

“Though most people are not even aware of this practice, it’s not incidental, and I guarantee you it is costing consumers thousands of dollars,” said Tom, a realtor. “Homebuyers should know exactly how much money they will spend for a mortgage broker’s service.”

In addition to requiring disclosure of YSPs, SB 6452 further requires that if the YSP turns out to be greater than the rate the homebuyer was told at the time they received their good-faith loan estimate, the difference should go back to the borrower, not the broker.

SB 6452 was approved on a 31 to 17 vote.

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