Mortgage crisis produces new home lending rules
If you think mortgage lenders were complicit in the financial meltdown, you will probably agree that more stringent banking guidelines are necessary. Two weeks ago, the Consumer Financial Protection Bureau issued the long awaited rules intended to spell out how lenders ensure that borrowers can repay their home loans intended to protect taxpayers against future bail outs, but watch out for the unintended consequences.
Like all new guidelines, it will take a while to see the real affects of these policies, which are intended to implement financial regulations created in the 2010 Dodd-Frank overhaul. The rules go into effect Jan. 1, 2014 and once implemented it is likely that banks will narrow their loan offerings and rely more on 30-year fixed rate mortgages considered safer and usually come with government guarantees. Because borrowers will need to qualify on higher monthly payments, the pool of qualified buyers could shrink considerably. This comes on top of mortgage qualification standards that have already grown very strict, requiring reams of paperwork and tough appraisals in order for banks to make their loans bulletproof.
The Consumer Financial Protection Bureau created a new category of loans called qualified mortgages. Qualified mortgages are designed to put the onus on the banks to adequately qualify the borrower. Regulators and courts would presume that lenders had reason to assume a borrower could repay. If a borrower determines the loan is unaffordable, borrowers can sue the lender for damages, at which point it would be up to the banks to prove they met the qualified mortgage definition in granting the loan.
In addition, certain product types are excluded from being a qualified mortgage like interest-only loans, loans where the principal balance rises over time and many exotic mortgages that were popular during the subprime era. Also, Jumbo loans that exceed government loan ceilings, which currently stand between $417,000 and $729,750 based on regional housing markets, could be facing tighter standards in order for them to meet the ability to repay statute.
Under the new rules, borrowers would be required to qualify for adjustable rate mortgages based on the highest payment that will apply in the first five years of the loan. Lenders also would have to thoroughly vet the finances of borrowers and make sure they spend no more than 43 percent of their pretax income on loan payments. The new rules cap loan origination fees at 3 percent of the loan amount with relaxed limits for loans under $100,000. The new rules don’t specify a minimum down payment for borrowers, but rather emphasizes the borrower’s ability to make their monthly payment.
In spite of these new regulations, lenders can still makes loans that aren’t considered qualified mortgages, however, most say they won’t considering the liability involved. Since Fannie Mae and Freddie Mac will not guarantee unqualified loans investors are unlikely to bundle these loans into securities that can be sold as an investment vehicle.
Government officials say these new rules should help to invigorate the mortgage market by assuring investors that the loans they buy from banks are sound. In the existing mortgage market, sound is defined as mortgages that are guaranteed by the government, which now can only be a government sanctioned qualified mortgage.
Will the unintended consequences of the Consumer Financial Protection Bureau’s rules be fewer buyers being able to qualify for a home mortgage slowing down the fragile housing recovery? Or will it create the perfect no fault mortgage qualifying utopia for eternity? We’ll have to wait and see.