If you’re planning to buy a house next year – and unless you’re in a position to make an all-cash offer – chances are you'll be affected by some significant changes occurring in the mortgage application process beginning in January.
Several federal agencies are implementing new policies aimed at addressing lax underwriting standards that led to the housing market crash more than five years ago. The new policies could play a role in how much house you can afford.
The policies require lenders to better verify that borrowers can afford the houses they are seeking to buy and can repay the loans. Some are intended to protect borrowers while holding lenders more accountable for their business practices.
For instance, one set of rules requires mortgage servicers to provide consumers regularly with accurate information about their loan balances and fix mistakes quickly. The rules also prohibit servicers from starting the foreclosure process until 120 days after the borrower’s last payment.
“By bringing back these basic building blocks of responsible lending and servicing the customer, we will improve conditions for consumers seeking to enter the market and for all those who are still struggling to pay down their existing loans,” Richard Cordray, director of the Consumer Financial Protection Bureau, said in prepared remarks made earlier this month to the Consumer Federation of America.
On Jan. 10, the Consumer Financial Protection Bureau will implement a new set of rules designed to address lending practices that spurred a wave of foreclosures that started more than five years ago.
Authorized by the Dodd-Frank Act, the “Ability-to-Repay” regulations are aimed at preventing lenders from approving mortgages for borrowers with questionable credit scores and poor debt-to-income ratios, and steering them into adjustable-rate loans or interest-only loans with little or no money down.
The housing crisis emerged in part when rates on ARMs were reset upward. Millions of homeowners who were not completely qualified for their mortgages lost their properties in foreclosure because they could no longer afford them.
The good news for borrowers is that the new rules will cap loan origination fees – they will be no more than 3 percent of the amount for mortgages of $100,000 and above. Currently, loan origination fees are not capped. However, to stay competitive, most lenders keep their fees low enough to attract customers yet high enough to make their business profitable.
The rules establish a standard for what the government considers a “qualified mortgage.”
Risky mortgages – negative-amortization, interest-only or balloon-payment loans – fall outside the qualified-mortgage standard.
Lenders will be required to thoroughly verify consumers’ income, assets and obligations – or otherwise risk a lawsuit from borrowers who default on their mortgages.
But while the regulations are intended to benefit consumers, some experts say that, like the Affordable Care Act, the changes may lead to complications and unintended consequences.
One example they cite is a provision in the rule that requires borrowers’ debt to make up 43 percent or less of their gross income.
“People who are right on the line of qualifying right now may not qualify in 2014” because of the policies set by Dodd-Frank, says David Zugheri, executive vice president of Envoy Mortgage in Houston.
In his prepared remarks, Cordray called it a myth that the new standard will prohibit lenders from issuing mortgages to borrowers who don’t meet the 43 percent debt-to-income ratio. Lenders, he said, would still have flexibility to make exceptions for buyers with excellent credit scores, significant assets or extenuating circumstances.
Higher loan costs
But some experts assert that lenders will be unwilling to make loans that don’t meet the qualified-mortgage standard. Because Fannie Mae and Freddie Mac won’t buy those mortgages, the lenders would be forced to keep them on their books.
Another criticism cited by some experts is that borrowers seeking conventional mortgages meeting the criteria of Fannie Mae and Freddie Mac may face higher fees.
Fannie Mae and Freddie Mac announced this month that guarantee fees they charge to lenders for servicing their loans will rise an average of 14 basis points on 30-year fixed-rate loans, on top of the 10 basis point increases in both December 2011 and August 2012.
Since lenders indirectly pass on the cost of paying the guarantee fees to consumers, Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, asserted that the change could have a negative impact on consumers’ ability to borrow money.
The fees charged to consumers used to be roughly 11 to 13 basis points, and now they are about 50 basis points, says Green. A basis point equals 1/100th of 1 percent, so 100 basis points would be equal to a one percentage point change in an interest rate. He says they could go as high as 70 to 75 basis points in the coming year or two.
Since borrowers are limited by qualified-mortgage rules to a debt-to-income ratio of 43 percent or less, higher mortgage rates and higher fees that increase the size of their housing payment make it more difficult for some borrowers to qualify for a loan.
Zugheri says that new regulations and higher expectations for compliance with rules established by Fannie Mae and Freddie Mac are hitting some groups of borrowers harder than others, such as low- to moderate-income consumers.
“If you have slightly spotty credit, your income isn’t clearly defined, your assets are hard to verify or the value of your home is difficult to appraise, you'll have a hard time getting credit and you may not qualify at all,” Zugheri says.
Doug Benner, vice president and sales manager of 1st Portfolio Lending in Rockville, Md., says the hard line requiring a maximum debt-to-income ratio of 43 percent will make it especially harder for self-employed borrowers who have trouble documenting their income.
“If you don’t have a W-2 to prove your income, it’s very difficult to get a loan, but the data shows that a larger percentage of the population is self-employed or doing contract work and they should be able to get loans,” Benner says.
Zugheri says the bigger problem right now in the housing market is that overregulation and capped compensation mean that many lenders will drop out of the business. Ultimately, he says, less competition among lenders will lead to higher fees and higher mortgage rates, which will hurt the housing market and particularly affect low- to moderate-income borrowers who have a harder time affording a loan.
“As the rule is written, the most a lender can charge for an $80,000 loan is $2,400, while the most they can charge for a $500,000 loan would be $15,000,” says Zugheri. “Some of the fixed costs are the same no matter what size loan you make, so some mortgage companies will just stop making smaller loans or will do fewer of them because they may even lose money on them.”