It’s been a long time in the making, but it looks as though the federal government has finally found a way to redefine mortgage guidelines in this country. It is unveiling new mortgage rules on Thursday and the goal is simple: to reduce risky lending while making it far easier for borrowers to understand the terms and conditions of their mortgage.
The Consumer Financial Protection Bureau has played a significant role in these new rules and its director, Richard Cordray, said on Wednesday,
When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford.
Before the mortgage crisis in 2008, there were very relaxed guidelines in place for lenders, brokers and loan officers. Everything from approving 100% financing applications – which meant homeowners didn’t have to fork out any kind of downpayment, to the stated applications that easily garnered approvals, no one was especially interested in definitive documentation. In fact, for awhile, one’s credit score wasn’t that big of a factor – consumers with scores in the mid and low – 500 ranges were approved. Of course, this was a disaster bound to happen. Soon, homeowners who had misrepresented information on their applications, including their income and job history, were struggling to maintain their mortgage payments. Often, these were the homeowners who found themselves in foreclosure before the first year had passed.
No sooner had the moved into their new homes, they were once again moving out – and this time, with troubled credit, often no job and few resources. At the same time, the veil slowly was lifted and the cold, hard light of day began hitting the country. Before long, we were hearing words like “too big to fail” in reference to many of the nation’s biggest banks, the Angelo Mozilos, the lenders closing their doors, robo signing and of course the truth about just how many subprime mortgages there were in the financial system. Before long, taxpayers were bailing out banks, even as they continued to commit crime after crime. The foreclosures hit as did the job losses and suddenly, we were neck deep in a recession that continues to haunt the country to this day.
As part of the 2009 CARD Act passed by President Obama, the Consumer Financial Protection Bureau was founded and moving forward with new financial rules for products such as mortgages, credit cards and student loans. Now, when a loan meets new lending criteria, which was redefined and rewritten by the CFPB, it gains the title of a “qualified mortgage”. That, in turn, provides protection for the banks from lawsuits filed by aggrieved borrowers or buyers of mortgage-backed bonds. This process serves two purposes: first, it protects consumers from predatory lending and it also protects lenders from lawsuits. If a bank doesn’t meet the criteria but moves forward with the loan anyway, the forfeit any kind of protection.
Perhaps more importantly, though, are the new guidelines consumers will begin operating from.
First, all companies that issue, approve or purchase from the initial lender will be governed by these new CFPB compliance guidelines. In short, every mortgage lender, credit union, bank and savings and loan company will be held to these changes. One analyst said it “encompasses most of the market as it exists today”. Other analysts are carefully reviewing the guidelines.
Before you can gain approval for a qualified mortgage, you need to know exactly what it is and how it differs from what we’ve historically been accustomed to in this country. According to the documents released, lenders must adhere to a series of requirements:
- Income and assets must be sufficient to repay the loan;
- The must have irrefutable documentation of their assets;
- Borrowers must document their jobs;
- Credit scores must meet minimum standards – note: those minimum standards have yet to be defined;
- Monthly payments must be affordable;
- Borrowers must be able to afford other debts associated with the property such as home equity loans;
- Borrowers must be able to afford all home-related expenses such as property taxes, appraisals and homeowners insurance;
- Lenders must consider a borrower’s other obligations like student loans, car loans and credit cards.
- The mortgage payments do not exceed 43% of the borrower’s pre-tax income.
Further, lenders are now prohibited from incorporating payments on interest-only loans or mortgages with balances that increase with time, sometimes referred to as negative amortization rates. Loans may not exceed thirty years and closing fees and other up front fees must not be excessive. Teaser rates are out too. The lenders must use reasonable standards in determining an ability to pay the mortgage for each homeowner. Also, jumbo loans aren’t out, but the same guidelines apply and the borrower must understand that these loans have no backing by Fannie Mae or Freddie Mac.
This might be the most important aspect for those who already own their homes. Those with subprime adjustable-rate mortgages or other so called risky loans who are considering a refinance may do so without going through the full underwriting process required by the new rules. Finally, CFPB is also working on new guidelines for mortgages backed by non profit agencies, such as those for low income buyers often turn to. The goal is to get these types of products exempt from the new rules. For now, the Home Affordable Modification Program as well as other loans made by community lenders remain as they are, but ideally, by this spring, CFPB will have put into place some exceptions for those types of refinances so that these homeowners are overwhelmed with new guidelines. That’s not yet been decided, however, the bureau reiterated its commitment of getting those details worked out as well.
So what do you think about the new mortgage rules? Did CFPB go far enough or did it cross the line? Are these new rules enough of an incentive for you to consider buying or refinancing your home? Share your thoughts with us and our readers.