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Feds Aim to Solve Mortgage Mysteries

Home buyers baffled by the details of their mortgage — the largest financial commitment many of them will ever make — will be getting help from new federal rules that aim to make the loan easier to understand.

The “Know Before You Owe” rules, issued in November, will take effect on Aug. 1, 2015. They will require lenders to give borrowers two forms — one shortly after applying for a loan, one three days before closing — that will use plain language to explain the interest rate, monthly payments and closing costs.

The rules were issued by the federal Consumer Financial Protection Bureau in response to the housing crash, which resulted in many borrowers defaulting on their mortgage loans. The CFPB says that with better disclosure, borrowers would have been better prepared to avoid risky loans.

The new rules replace 30-year-old rules requiring that lenders give borrowers Truth in Lending statements and an HUD-1 uniform settlement statement. The CFPB said that in tests, consumers found the new forms easier to understand and more helpful in figuring out whether they can afford a mortgage.

When exotic mortgages were being written during the housing boom, homeowners often unknowingly got into toxic loans, according to Phyllis Salowe-Kaye, head of New Jersey Citizen Action, the state’s largest housing counseling agency. She said struggling homeowners were surprised to find that their interest rate was set to jump, or that they owed a large balloon payment after several years.

“A lot of people never knew it was even in their mortgage,” she said. “People had no idea.”

Allen Susser, a real estate lawyer in Saddle Brook, N.J., said current mortgage disclosures can be “terribly confusing,” but said he was skeptical that the new disclosures would explain matters any better.

Dave Stein, chief operating officer of Residential Home Funding in Parsippany, N.J., also said that while it’s a good idea to clarify mortgage disclosures, previous efforts to do that have not been very successful. And he said consumers must do more to educate themselves.

“I know they always have the consumer’s best interest in mind, but consumers often don’t take the time to understand it,” he said. He and Susser said the requirement that borrowers get the documents three days before closing could delay closings.

Steve Hoogerhyde, chief lending officer at Clifton (N.J.) Savings Bank, said it’s a good move to combine the mortgage disclosures under one agency — the CFPB. Currently, the disclosures are regulated by two agencies: the Federal Reserve and the Department of Housing and Urban Development.

Hoogerhyde said the new rules may help home buyers decipher their mortgages. But he said any improvement depends how well the new disclosures are designed.