New rules may make mortgages harder to get, more expensive

Bank executive: “I’d be worried that middle income Americans and lower income Americans” will be most impacted by the rules.
TNS Regional News
Jan 23, 2014

 

Homebuyers will have more difficulty qualifying for a mortgage, and financing a home purchase could be more expensive over time, as lenders adopt newly-introduced federal rules for mortgages, local loan officers say.

New mortgage regulations mandated by the Consumer Financial Protection Bureau went in effect this month. The rules are meant to hold lenders liable for bad loans and protect borrowers from loans they can’t afford.

The biggest changes for new homebuyers is proving they can afford a home loan, said Tim Mislansky, senior vice president and chief lending officer of Wright-Patt Credit Union Inc. Ohio’s largest credit union, Wright-Patt operates branches in Clark, Greene, Franklin, Hamilton, Miami, Montgomery and Warren counties.

Borrowers will have to show more documentation of income and assets, and lenders must document they reviewed an applicant’s credit history, Mislansky said.

Also, the federal consumer watchdog agency set a number for determining if a buyer can afford their mortgage payments, Mislansky said. The federal agency’s number — the debt ratio, or what percentage of monthly income is used to pay debt — is 43 percent. Debt includes payments on student and auto loans, credit cards, alimony and child support.

A loan to a borrower with a higher than 43 percent debt ratio is considered higher risk, Mislansky said. Before, there was no set number, and debt-to-income consideration was at the discretion of the lender.

“The issue that most lenders have is that 43 percent is kind of an arbitrary number,” Mislansky said. “Some folks who may have qualified in the past may have trouble qualifying in the future.”

Under the rules, the federal regulator created a set of loan standards. Mortgage lenders that originate a so-called Qualified Mortgage can sell them to the secondary market to buyers such as government-backed Fannie Mae or Freddie Mac. A qualified loan must be backed by Fannie or Freddie; be insured by a federal housing agency; and/or meet the 43 percent debt ratio rule, according to the CFPB. Interest only and negative amortization loans that were previously commonplace will not be qualified.

Lenders can still make loans that don’t meet the standards, but might not be able to sell these loans, which creates more risk for the lender. There are also exceptions for small lenders.

“I’d be worried that middle income Americans and lower income Americans” will be most impacted by the rules, Mislansky said. “If credit availability truly does shrink, that’s the group where it’s going to shrink. It’s not going to shrink on the wealthy or the upper class.”

The CFPB estimates roughly 92 percent of mortgages in the current marketplace meet the Qualified Mortgage requirements. The regulations put into law practices that most lenders have already adopted in response to the housing crisis, a spokeswoman with the agency said.

“Lenders can offer any mortgage they believe a consumer has the ability to repay, as long as they have documentation to back up their assessment. Not all loans will be Qualified Mortgages,” according to a written statement from the Consumer Bureau.

Other changes include a 3 percent cap on qualified loans over $100,000 for fees and points charged by lenders directly, such as underwriting and processing fees. Fees for services not performed by the financial institution, such as appraisal fees, are not capped. But the cap does include charges from companies affiliated with the lender such as a title company.

Loan officers with two of the region’s largest home lenders — Fifth Third Bancorp and Wright-Patt Credit Union — see the overall regulations as positive steps. Financial industry practices that lent money with little proof of income, and adjustable-rate mortgages with interest rate spikes, led to an economic crisis beginning in late 2007 and 2008 when homeowners could no longer afford their payments.

“They’re trying to stem off the bubble from before where there was irresponsible lending years ago,” said David Gunn, head of mortgage for Fifth Third Bank’s greater Cincinnati affiliate.

But it could be harder to obtain a loan in the coming months as heavily scrutinized lenders are extra careful rolling out the rules, Gunn said.

“It’s going to be a cautious lending environment at least initially,” Gunn said.

Lorie DiStaola, executive director of Neighborhood Housing Services of Hamilton Inc., a nonprofit homeownership counseling agency serving all of Butler County, said banks have already tightened their belts for extending credit. The rules are more likely to affect the amount of loan a person can qualify for.

For example, someone may not be able to borrow $125,000 because they’re over the 43 percent debt ratio. Instead, they may qualify for $115,000, DiStaola said.

“It’s not so much somebody’s not going to be able to qualify, they’re going to qualify for less,” DiStaola said.

Big changes existing homeowners will see are monthly statements from the bank or credit union from which they got their home loan. This was not previously mandated.

Lenders now have certain obligations to meet with people having trouble paying their mortgages. For example, a foreclosure cannot be initiated before 120 days of default and during that time, lenders are to work with homeowners on loan modifications or refinances to keep them in their home, according to the CFPB.

Other rules require lenders to fix issues quickly and credit payments quickly.

The cost of implementing the new rules, which require updates to policies, procedures and software, could make mortgages more expensive as costs are passed on to consumers in loan rates and fees, Gunn said.

“The additional cost to comply for banks I think invariably has to go somewhere,” Gunn said. “Implementing these can be expensive.”

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By Chelsey Levingston - Journal-News, Hamilton, Ohio (MCT)

©2014 the Journal-News (Hamilton, Ohio)

Visit the Journal-News (Hamilton, Ohio) at www.journal-news.com

Distributed by MCT Information Services

Comments

rbenn

Hope and change lol, you wanted it you got it.

mobekat

The name of the bill is Dodd- Frank - not Obama

rbenn

On July 21, 2010 Dodd-Frank was enacted. Also Signed into law by yes you guessed it Obama!!!

swiss cheese kat's picture
swiss cheese kat

Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into federal law by Barry 0-bama on July 21, 2010. Dodd-Frank is as flawed as 0-bamacare. It helps wall street, not the average working class American.

Really are you ...

Class warfare. Making it harder on the middle class. Awesome! Oppression! Glad there are loads of quality jobs in the States. Government really isn't looking out for its people. Not talking about the life raft it has been putting out there to make up for jobs relocating for lesser pay, but lack of advancing our culture and ability to be self sustainable. The banks should have been regulated better to avoid the bursting housing bubble that happened recently. Just glad they got a good portion of the bailout. Now the banks are taking it to the average Joe.

TOPGUN01

36% debt was the banks old ratio!They should stay at that!

JMOP

I'm all for this. Banks shouldn't give out home loans unless they know for sure people can afford it.
From my own experience 15 years ago:
Tired of wasting money in renting, the spouse and I decided to get a loan to buy a house when we were in our early 20's. Nothing fancy, we asked for $100,000. We figured out our monthly payments, and that's all that we could afford to pay on a monthly mortgage at a 7% interest rate.
The surprise came when we were approved for over $150,000 with no money down (expect for a $3,000 closing cost fee). We were tempted, but had enough sense to only purchase what we could afford. Some people don't make that choice, as you could see with what happened in the housing collapse in 2008.
The government has to police the stupid, so the rest of us has to suffer.

RateBid's picture
RateBid

I'm glad that this article pointed out that the 43% debt-to-income "DTI" limit is not applicable if the loan is "backed my Fannie or Freddie". To add to this, basically this means that as long as the loan get's an "approve" or "accept" response from the software that basically every mortgage lender uses during underwriting, that 43% DTI limit is not applicable. These software programs were developed by Fannie, Freddie, and USDA,and are capable of running scenarios for conventional, FHA, VA, and USDA loans. This is why most loans are already "qualified mortgages" since most lenders require the "approve" or "accept" responses from these software programs before they'll even approve a loan. The article mentions how borrowers seeking lower loan amounts could be impacted due to the limit on fees, which is true. What was not mentioned is how higher "jumbo" loan borrowers could be impacted negatively. How could this be?

Jumbo mortgage loans obviously have higher mortgage payments associated with them, yet since they are not "conforming" (meaning they can't be backed by Fannie or Freddie), the maximum debt-to-income ratio IS 43% IF the lender wants to have the "safe harbor" position from a liability standpoint, should a foreclosure occur (and lenders DEFINITELY want to be in a safe harbor for bigger loan sizes). Let's say that somebody borrows $750K at 5.5% on a 30 year fixed Jumbo loan. With taxes and insurance, the monthly payment could be as high as $5,000. Now, assume that between a couple car payments and credit card minimum payments, they have another $1,500 in monthly debt. So, total monthly debt = $6,500. This means that monthly gross income must be $6,500 / 0.43 = $15,116 just to qualify as a qualified mortgage! This (family) must have a gross "residual" of $15,116 - $6,500 = $8,616 (before income taxes, etc.). That is QUITE A BIT of money to "require" these people to have "left over", don't you think? Regulators need to factor in the impact of how this 43% rule mathematically works backwards to require such a high income level. Higher loan amounts should allow for lower ratio requirements. Of course, there are some lenders with the appetite for risk and will make non-qualified mortgages. I typically direct people to mortgage comparison websites such as www.RateBid.com, which allows borrowers to anonymously watch lenders compete for their loan scenario after reviewing specifics. Borrowers can even enter a note "my DTI is > 43%" into their post, which would allows the borrower to efficiently "zero in" on lenders that would be willing to make a non-qualified mortgage and also which lenders can offer the best terms, all in one place.