This past week the CFPB (Consumer Financial Protection Bureau) announced their new rules on residential home mortgages, leaving consumers wondering just how this will affect potential home buyers.
While the exact details are still being tweaked, the basic idea of the new rules is that borrowers with less than perfect credit are going to have a more difficult time when it comes to securing a mortgage and borrowers that do qualify will receive extra protection against certain charges that in the past were considered quite excessive.
As of now, there is no clear answer on whether the new rules will have an overall impact of the availability of home loans for all consumers. A variety of critics are stating that these stricter guidelines will slow down the entire lending process, but there are supporters of the rules that feel they minimize lender uncertainty, as they will be able to have confidence in their borrowers due to the fact that there are additional liability protections in place.
The main objective of the new mortgage rules is to make certain that potential borrowers will only be approved for mortgage loans that they can realistically afford. During the major housing bubble, this was not always the case, putting both lenders and risky borrowers in jeopardy. To ensure that this practice is utilized in the lending process, the CFFB has created an “Ability to Repay” rule, and this rule will be applied to all future mortgages and standards for any “Qualified Mortgages” that meets these specific guidelines.
For the Ability to Repay rule, borrowers should be prepared to supply specific information regarding their financial situations as well and there are also specific factors that will be taken into consideration. Here is what potential borrowers should prepare for:
Limit on Total Debt
Under the new rule, the total monthly debt of the borrower that includes mortgage payments as well as any additional costs that include property tax and homeowner’s insurance, must not exceed 43 percent of their total monthly income. This rule comes with a phase in period of seven years, allowing any mortgage loan that exceeds the limit but meets the additional government backed underwriting standards of Fannie Mae, FHA, Freddie Mac to qualify.
Documentation of Income
Loan applicant’s income must be documented and verified by the lender. Documentation must show that the applicant has enough income and assets that will allow for repayment of the mortgage, meaning “liar loans” where the applicant is only required to sign a written statement that attests to their income will no longer be sufficient. For both the self employed and higher net worth borrowers, this could pose various issues if they are used to the convenience of stated income lending.
Affordability for the Long-Term
Under the new rule, lenders that have previously assessed their borrower’s ability to pay back home loans that are based on a temporary rate, sometimes referred to as a “teaser”, must now look at the borrower’s ability to pay make steady payments on their loan based on their documented assets and income of the present time.
For the Qualified Mortgages standards, here is what borrowers as well as lenders should expect:
For all loans that have met the standards for Qualified Mortgages, it will be automatically assumed that they will meet the Ability to Repay rule. Any lender who signs off on a Qualified Mortgage will be protected against potential liability if for any reason the borrower’s financial status changes and they are unable to pay their loan in full. Home loans that are Qualified Mortgages have the potential to rule the future market due to the fact that the protection they provide lenders will make them lower cost in the long run.
The interest rate on any Qualified Mortgage may not be more than 1.5 percentage points above the base prime rate for that particular mortgage loan. The thinking behind this is that since loans that are in the high risk category tend to have extremely high rates, this will limit individuals with less than perfect credit from obtaining mortgages that they ultimately may not be able to afford.
Point and Fee Limitations
All Qualified Mortgages will have a total limit of 3 percentage points charged. The reason for this is that any additional charges of fees and points is what lenders do to minimize their risk when lending to risky borrowers. This will limit the overall ability of these loans to borrowers with low credit scores or borrowers that fall into the high risk category. Borrowers can also use bona fide discount points to assist in reducing their particular interest rate by a specific amount for every 1 percent of the mortgage that they pay for upfront.
Ban on Loan Features that are Considered “Toxic”
Loan features that are regarded as extremely high risk are not allowed for any Qualified Mortgage. Particularly high risk loan features include negative amortization in which the principle amount owed continually increases, balloon payment mortgages, and lengthy loan terms that exceed 30 years.
Rules and Regulations on High Cost Mortgage Loans
High cost home loans that don’t meet the Qualified Mortgage standards are also subject to the new guidelines. A high cost mortgage loan is any home loan that has interest rates that exceed 1.5 percentage points over the average prime mortgage and refinancing rate or 3.5 percentage points on any home equity loan.
These rules will most likely impact the jumbo loans, which are defined as loans that exceed $417,000 throughout most of the United States, and in counties where homes are of significantly high value, a jumbo loan will define any loan that exceeds $729,750.
Balloon Payment Restrictions
In most cases, balloon payments will not be allowed for high cost mortgages, but loans in rural locations will be exempt. Early re-payment penalties are strictly prohibited.
All Closing Costs Must Be Paid Upfront
The new regulations will strictly prohibit the implementation of closing costs into the overall mortgage payments.
For high cost mortgages, all late fees will be limited to 4 percent of the total amount due. Loan modifications will not be subject to fees, and fees associated with payoff statements will be limited as well.
Before high cost mortgages receive final approval, borrowers must attend housing counseling sessions.
Smaller Lenders Can Provide High Risk Loans
For homeowners that fall into the high risk category, they may still be able to obtain a mortgage through a smaller lender or credit union. There is an amendment under consideration for smaller lenders that may allow for them to handle higher risk loans as long as they keep said mortgage loans on their own company’s books and agree not to sell them to mortgage lenders on the secondary market.
While these rules are currently set to take effect on Jan 10, 2014, the CFFB is currently taking all feedback and suggestions into consideration, allowing for various stipulations and possible changes to be made.