How Will New Mortgage Regulations Affect You?

Starting in January of 2014, the mortgage market could be in for some major changes. In an effort to protect consumers, the Consumer Financial Protection Bureau (CFPB) has issued final rules for a “Qualified Mortgage” (QM), providing safe harbor for lenders who issue such mortgages. Mortgages that don’t qualify could expose lenders to lawsuits from borrowers. These changes may not please all borrowers.

Highlights:

• New mortgage rules are designed to ensure that borrowers can repay

• Jumbo loans will be harder to qualify for; interest-only & balloon loans no longer offered

• Homeowners will get renewed protections when they fall behind on payments

Features of the QM loan are:

1. No Excessive Upfront Points and Fees. QM places a limit on additional charges of 3% of the total amount borrowed.

2. No toxic loan features including: no interest only loans, no negative amortization loans, no terms beyond 30 years, no balloon loans.

3. Limits on Debt-to-Income Ratios. Debt-to-income ratios will be limited to 43% as compared to 45% currently allowed. A temporary exception will be granted for loans that are eligible to be sold or insured by Freddie Mac, Fannie Mae, FHA or VA. Consequently, the only loans subject to the 43% DTI limit would be jumbo loans (exceeding $417,000 loan amount). About 9% of jumbo loans issued in 2012 went to borrowers with DTI ratios higher than 43%, CoreLogic data show.

As reported by Bankrate.com, “The new mortgage rules won’t affect the majority of people seeking to buy a home or refinance their home loans because lenders have already tightened their lending standards since the financial crisis in 2008. But, analysts say that certain groups of borrowers will notice a difference. This is especially true for jumbo mortgage borrowers and self-employed borrowers who may need to jump through even more hoops to get a home loan.”

Attorney Robert Ledig reports, “It is possible that when the rule becomes effective in January 2014, lenders may be reluctant to make loans that do not qualify for the QM safe harbor. Non-QM loans will carry significantly higher litigation risks and may be more difficult to securitize. According to the bureau, non-QM loans would have amounted to about 22% of the market. Over time, it is possible that the new rule will result in a substantial reduction in the availability of mortgage credit.

Summary

The end result could be far fewer customized “portfolio loans.” Portfolio loans are those loans closed and serviced by commercial banks that are not sold in the secondary market. What does this mean for over 20% of current borrowers? You will need to work closely with your mortgage banker who will help find ways to fit unusual situations into the plain vanilla requirements imposed by the agencies. “We’ll just have to work even smarter and harder to get our borrowers the financing they need,” says Diane Pyshos, Senior Mortgage Consultant.

Photo Courtesy Of:  Haydn Blackey