Published January 10, 2013
Federal officials handed down new rules on mortgage-lending practices aimed at reducing risky loans and protecting consumers from mortgage abuse, and will change the home-buying process for most consumers.
The Consumer Financial Protection Bureau adopted the qualified mortgage rule on Thursday that details criteria lenders must use to determine if a borrower qualifies for a loan. The CFPB describes the Ability-to-Repay amendments, which go into effect next year, as a “common-sense rule” that protects borrowers from the kinds of risky lending practices that resulted in the 2007 housing market crash that ultimately led to the Great Recession.
“Both borrowers and sensible lenders are on the same page here,” Rajeev Date, deputy director at the CFPB, told FOX Business on Wednesday. “Everybody ought to want loans where the borrower has a reasonable chance to pay the thing back, and that's what this rule will do going forward, and that's what, unfortunately, we lost during the course of the run-up to the crisis in 2005, 2006 and the first half of 2007.”
The rule states a qualified mortgage cannot include risky features such as extending beyond 30 years or include exotic terms like interest-only payments or negative-amortization payments where the principal amount increases. Loans can’t carry fees and points above 3% of the total mortgage and limits the total debt-to-income ratio at 43% -- which some worry will restrict credit and discourage homebuyers at the lower-end of the income scale from seeking a mortgage.
On the other hand, some experts argue the rule that mortgage payments don’t exceed 43% of a borrower’s pre-tax income doesn’t go far enough.
“That figure is still high, most borrowers meet that standard easily today,” says Jed Kolko, chief economist at online housing marketplace Trulia. “These rules are not primarily designed to change the mortgage market today, they are to prevent a repeat of the very lax mortgage rules we saw during the bubble.”
Lance Roberts, CEO of Streettalk Advisors, would like to see the ratio fall to around 30-35% to help generate more savings, but there could be a downside to bumping up the requirement.
“You are going to exclude more low-income and first-time homebuyers from being able to buy a house, but that is OK…America is the only country in the world where the poor people live in a three-bedroom house with a pool in the backyard.”
The newly-created agency established the rules in response to the 2010 Dodd-Frank financial-regulation overhaul that said if banks issued “qualified mortgages” they would be protected from lawsuits from consumers who end up delinquent and in foreclosure. Banks can issue loans that do not meet the new criteria, but might run into problems reselling them on the secondary market and would not get the legal protection against consumer lawsuits claiming a risky loan.
The rule will change the way homebuyers will obtain a mortgage. Lenders must now evaluate a borrower’s income and assets and ability to repay the loan, credit scores and other debts like credit cards and students loans before issuing a loan—standards that went out the window in the years leading up to the 2007 housing burst. The amendments also prohibit the use of teaser rates that mask the actual cost of a mortgage to attract borrowers.
The new measures do not set minimum down payment amounts or credit score requirements.
Roberts says the changes are a step in the right direction to bring back a healthy housing market, but he isn’t holding his breath that the changes will be long lasting.
“Everyone will figure out a way around the rules. We had mortgage rules back in 2007 and people figured out ways around those rules that led to the bubble and crisis.”