Thursday, January 10, 2013
The Consumer Financial Protection Bureau unveiled new mortgage lending rules Thursday, designed to protect borrowers from the worst of the risky banking practices that ultimately led to the 2008 housing bust.
The new Ability-to-Pay rules require lenders to ensure that would-be borrowers can afford the mortgage debt they take on by verifying important financial information such as employment and debt obligations, and the rules bar lenders from basing ability to repay on low teaser rates.
"The core of the Ability-to-Repay rule rests on two basic, common-sense precepts: Lenders have to check on the numbers and make sure that the numbers check out," said CFPB director Richard Cordray in prepared remarks to be delivered at a hearing on the new rules Thursday.
But while the new rules might seem like the most common sense regulations to ever hit government books, the impact of one rule in particular has the potential to reshape the nation's mortgage and housing markets.
The qualified mortgage rule, mandated by Congress as part of the 2010 Dodd-Frank Wall Street Reform Act, is supposed to clean up the messy practices of the mortgage industry, but critics say if the rules are too stringent, it could become even harder for people with less-than-perfect credit to get home loans.
Here's a look at the key attributes of qualified mortgages according to the latest definition from the CFPB:
Cap on debt-to-income ratio: Qualified mortgages will generally be available to consumers with debt-to-income ratios of 43 percent or less. For a limited, seven-year transition period, some loans that do not have a 43 debt-to-income ratio but meet government affordability or are eligible for purchase by Fannie Mae or Freddie Mac will be considered qualified mortgages.
The CFPB adopted the second definition to give the market time to adjust to the new standard, a senior CFPB official told reporters on a conference call Wednesday. Over time, officials anticipate that share of the market to shrink as other federal agencies make their own rules and conservatorship [of Fannie Mae and Freddie Mac] ends.
No excess up front points and fees: Qualified mortgages limit the number of points and fees used to compensate loan officers and brokers.
No toxic loan features: Qualified mortgages cannot have risky loan features such as terms longer than 30 years or negative-amortization payments in which the principal increases.
Legal protections: Two categories of qualified mortgages were created with different legal protections. Qualified mortgages with rebuttable presumption are higher-priced loans given to consumers who have been determined by a lender to have the ability to repay the loan but have insufficient or weak credit history. Consumers can challenge the lender's presumption if they did not, in fact, have sufficient income for living expenses while repaying the loan. The other category—qualified mortgages with safe harbor status—are lower-priced loans made to less risky borrowers. These loan types offer lenders the greatest legal certainty that they are complying with the new mortgage lending rules, but consumers can still challenge a lender if they believe the loan did not meet the definition of a qualified mortgage.
Despite concerns that too-tight regulation could shut out a large swath of would-be homebuyers, the rules as they stand seem "fair and reasonable," according to Doug Lebda, CEO of LendingTree.com, who adds that while the new regulations probably won't further restrict credit, they won't loosen conditions either.
"It's good for borrowers with good credit, but those with weaker credit who don't fall under the safe harbor provision, lenders could be reluctant to make loans to them," Lebda says.
A lot of that centers around the rebuttable presumption. Although qualified mortgages with rebuttable presumption are priced higher to compensate lenders for the additional risk, the potential for consumers to challenge a lender's determination of ability to pay is an additional risk. That means even with greater regulatory clarity, consumers could still face ultra-tight lending conditions when it comes to residential home loans, Lebda says.
Although myriad other factors stand in the way of more mortgage lending—including stricture bank capital requirements and general economic conditions—regulators are hopeful that with more certainty, the pendulum in the mortgage market will swing once again. This time not to the extremes of feast or famine, but to a sustainable middle ground.