New Mortgage Rules Go Back to the Future
NEW YORK ( MainStreet) Beginning January 2014, the Consumer Financial Protection Bureau (CFPB) has implemented new rules designed to protect those seeking a mortgage from the predatory practices that led to the housing crisis of several years ago.
But the new rules seem to be going back to the future. Some are a return to common sense safeguards that were abandoned during the past 20 years. Others are innovations enacted from lessons learned from the housing depression.
Many, like myself, easily recognize the common sense rules of borrowing money followed when I bought my first house more than 30 years ago. They are rules that reinforced the notion one needed to live within one's means.
For one thing, the CFPB has decreed that "beginning on January 10, 2014, lenders making virtually any residential mortgage loan will have to assess a borrower's ability to repay the loan."
One would have thought this was always the case. The pertinent questions here are when did lenders start issuing unaffordable mortgages and why; and when and why did borrowers start taking out loans they could not afford to repay? As we shall see, there are those who want looser lending standards.
There is a Qualified Mortgage (QM) standard that "....avoids risky features and meets other requirements." One such requirement is that borrowers can only have a total monthly debt-to-income ratio - including mortgage payments - of 43% or less. The QMss cannot have "...risky features like negative amortization or interest-only payments."
There will also be limits on fees and points for mortgages. Those in excess of $100,000 cannot be a QM if the points and fees are more than 3%.
But the CFPB does not ban other types of mortgages - with the exception of the notorious no documentation or low documentation loans. Lenders of riskier loans merely have to show they made a good faith effort to ascertain the borrowers ability to repay the loan. Such loans will not be QMs though.
As previously mentioned, the CFPB is implementing some new policies that will be very beneficial to consumers. For example, mortgage servicers will be required to send a "clear monthly statement" indicating to borrowers the monthly payments are credited. Servicers must also provide early notice when the interest rate is about to change for Adjustable Rate Mortgage holders.
Yet, there are always critics. Indeed, these criticisms are also going back to the future. But instead of returning to the living-within-your-means paradigm, they want a return to the homeownership-at-any-cost policies.
Their opprobrium was voiced during a January 14 Congressional hearing called "How Prospective and Current Homeowners Will Be Harmed by the CFPB's Qualified Mortgage Rule."
One criticism is that these rules will decrease mortgage demand because of credit tightening. Another complaint is that the 43% debt-to-income ratio requirement to issue a mortgage will hurt lending to minorities.