Luke Mullins

While the law won't upend home-buying traditions, it will trigger key changes to the mortgage market

While the financial reform legislation won't upend the conventions of buying or selling a home, it will precipitate key changes within the mortgage market. Even after all of the new rules are implemented, most consumers will still encounter the same figures--real estate agents, mortgage brokers, home inspectors--that have long defined the home-buying process. But the legislation includes a number of specific provisions that, while perhaps less visible to house hunters, will have a profound effect on the type of mortgage that buyers end up with. "The interface with a broker or a lender won't change," says John Taylor, the head of the National Community Reinvestment Coalition. "It's just what the broker and lender is offering will be screened to protect the consumer from getting bad loans." Here is a look at the main real estate-related provisions of the financial reform legislation and what they mean for you:

1. Evaluate repayment.

The massive home-price swings that took place in recent years were linked in large part to consumers' ability to obtain mortgages they couldn't really afford. The legislation addresses this issue by forcing lenders to ensure that mortgage applicants have the financial wherewithal to repay a loan before they grant it. Taylor calls this provision a "critical" step in the creation of a safe mortgage market. "Had that standard been in place [in the years before the housing boom], we would have avoided in great part the foreclosure crisis," he says.

2. Incentive structure.

During the run-up to the housing bust, brokers in many cases received increased fees for putting borrowers into subprime mortgages, says Julia Gordon, senior policy counsel for the Center for Responsible Lending. This structure incentivized brokers to steer borrowers into risky mortgages even if they qualified for safer products. The financial reform bans such financial incentives. "You can't make more [money] if you somehow talk [the borrower] into a higher-rate loan," Gordon says. The law "takes aim at some of the underlying bad incentive structures that created the problem."

3. Risk retention.

A key shortcoming of the mortgage market's "originate and distribute" model was that brokers passed off the risks associated with a home loan when they sold it into the secondary market. As a result, mortgage originators had less incentive to ensure that the loans they sold were of sufficient quality. The new law, however, requires firms selling mortgage-backed securities to hold on to at least 5 percent of the credit risk for all but the safest home loans. By compelling these companies to bear a portion of the risk themselves, the provision is designed to ensure that mortgages are underwritten more soundly.

4. Consumer watchdog.

The law creates a new federal agency responsible for protecting consumers from abusive and unsustainable financial products. The new agency, which will have autonomous rule-making authority, will oversee banks, credit unions, payday lenders, mortgage brokers, and loan servicers. The agency "will flag unsavory lending practices, and have the mission--it's mission as a federal department--to prohibit those activities," Taylor says. (Banks and credit unions with less than $10 billion in assets will not be subject to the new agency's authority.)

5. Streamlined disclosures.

The legislation also includes language to ensure that consumers can get clear information about mortgages through a more streamlined disclosure process, Gordon says. "Anyone who has gotten a mortgage knows that they get a stack of paper," she says. "Part of the reason for that stack is how many different agencies we have whose job it is to create disclosures related to different statutes." The new law, Gordon says, streamlines this process by filtering disclosures through a single agency. "It significantly simplifies the process," she says. "Not only will you have fewer pieces of paper, but hopefully they will be simpler and easier to understand."

What it means for you:

Although the legislation has been passed by Congress and signed into law by President Obama, the process of reforming the mortgage finance market is far from over. First, regulators must draft and implement scores of detailed rules, a process that is likely to play out over many months. Meanwhile, the legislation doesn't attempt to address the future of mortgage finance giants Fannie Mae and Freddie Mac.

Still, the law goes a long way toward resolving many of the issues that triggered the housing mess, Gordon says. "The mortgage marketplace will be a safer place to be," she says. "There are fewer ways you can be sold a very risky or exotic mortgage." However, the same forces designed to help create a safer marketplace may also work to prevent some consumers from obtaining home loans and reduce the diversity of mortgage products available.

For example, since mortgage originators will now share the risks of certain loans, they are likely to increase their scrutiny of borrowers, says Dean Baker, co-director of the Center for Economic and Policy Research. For many lenders, that might mean requiring additional documents about a borrower's income and assets. "There are going to be some people that would have been able to get mortgages during [recent] years--2005, 2006--that are not going to be able to do it," Baker says. "They don't have the credit record or earnings history."

But while certain exotic products may become more expensive, most well-qualified buyers in the market for safer, fixed-rate mortgages shouldn't see financing costs increase as a result of the law, Baker says. "Someone who has got a prime mortgage, who is putting 20 percent down--I don't see any reason to think that their fees are going to be higher on average," Baker says.

Perhaps more fundamentally, the reform will precipitate a reduction in the diversity of financial products available to most consumers, says Mark Calabria, the director of financial regulation studies at the Cato Institute. "You will see fewer choices--a lot of the things like the pay-option ARMs, and particularly some of the negative amortization products are going to go away," Calabria says. "There will be much more push toward a 30-year [fixed-rate] mortgage."