the Plain Vanilla Mortgage Comes Back with a Bang

Plain vanilla mortgage is back with a bang! A year ago Obama administration had set out its goals for financial reform. Among the many aspired goals, one was that lenders should offer "plain vanilla" loans to prospective real estate buyers. The definition of plain vanilla mortgage is not as simple as it sounds. It includes not only 30 year fixed rate mortgages but also hybrid ARMs. A plain vanilla mortgage generally amortizes in 30 years or less and can be fully documented with reasonable interest rates and fees.

The Senate had tossed out the existence of plain vanilla mortgages but a form of it still exists. After the passing of the bill from the House-Senate lenders require to offer plain vanilla products to prospective home buyers and offer them straightforward pricing. A new regulatory agency would require all providers to offer these products to homebuyers notably besides whatever other lawful products they choose to offer.

The Obama administration actually has proposed a reform of banking regulations that would shove consumers into taking fewer risks when they borrow. The new regulation also demands financial disclosure documents to be made simpler and easier to understand. These new rules adopted by the administration would push mortgage companies to compete on interest rates and prices rather than on variety of loan program types.

The Obama administration has proposed creating a Consumer Financial Protection Agency or CFPA. Right now the states regulate the mortgage brokers, savings and loan are regulated by another agency and national banks and mortgage lending institutions are regulated by others. The Federal Reserve oversees one set of disclosures when you apply for a mortgage and the HUD oversees another. The CFPA is formed to monitor all these disclosures under its wide coverage.

The new agency defines the plain vanilla home loans that include adjustable rate mortgages. Lenders who will offer such loans to prospective homebuyers will have to follow some rules. They have to ask for full income documentation, collect the escrow from taxes and insurance, make monthly payments quite predictable and cannot charge penalties on prepayment. These plain vanilla mortgages are very simple to get but it is not that lenders will no more offer complex loans. It is just that the borrowers have to cross some obstacles to obtain them.

Ultimately it will be more commonly seen that the big banks will use plain vanilla mortgages. Most borrowers will also go for such a home loan because of the simplicity in the procedure of getting it as well as in the documentation. The Obama administration wants to ensure that the new structure does not in any way stifle innovation or increase the costs for consumers in getting a mortgage.