New Mortgage Rules

Dec 30, 2013 by

banker explaining credit to a customer

George, you don’t qualify for a mortgage. Get out!

Remember the financial crisis? When such things happen, governments react by creating new regulations. (Gratuitous commentary: nine times out of then these regulations become ineffective as enterprising, creative, relentlessly cash-seeking capitalism works its way around them. But politicians and government bureaucrats get to crow about protecting “‘Marekins,” and so it goes.) Among the slew of new regulations that sprang from the 2008 financial meltdown are new rules, set to take effect January 10, issued by the Consumer Financial Protection Bureau (CFPB) regarding mortgages.

What’s Changing in the Mortgage Industry?

According to the CFPB, here’s the purpose of the new rules:

Beginning in January 2014, some new CFPB rules will provide homeowners and consumers shopping for a home mortgage with new rights and greater protection from harmful practices. These rules should eliminate or sharply reduce the runarounds and painful surprises that hurt so many homeowners during and after the financial crisis.

The CFPB says that “[v]irtually every mortgage a lender makes must now [after the CFPB rules go into effect] be evaluated based on the borrower’s ability to repay that loan.” This strikes me on its face as absurd. Are there lenders out there who disregard a loan applicant’s ability to repay? Apparently the CFPB thinks so and blames the financial crisis in part on these real-life George Bailey types.

The CFPB’s new rules define a new class of mortgage, called a Qualified Mortgage (QM), “for which borrowers who qualify are presumed to be able to repay.” The CFPB says “QMs are designed to be safer and easier to understand than many of the loans consumers got in the lead-up to the financial crisis.”

A CFPB Qualified Mortgage will boast:

  • A borrower debt-to-income ratio of 43% or less (however, loans eligible for purchase by Fannie Mae or Freddie Mac or for insurance by federal agencies don’t have to meet this debt-to-income standard until 2021).
  • No risky features like negative amortization or interest-only payments.
  • Points + fees totalling less than 3% of the loan amount for mortgages of $100,000 or more.

Now here’s the juice: issuing a QM gives the lender legal protection against charges of inappropriate lending.

Other Features of the New Mortgage Rules

The CFPB brags of these other benefits of the new mortgage rules:

  • Mortgage servicers must send borrowers a clear monthly statement.
  • Mortgage servicers must fix mistakes promptly (undefined).
  • Payments must be credited the day of receipt.
  • Adjustable Rate Mortgage holders will get “early notice” if their loan’s rate is about to change.
  • Mortgage servicers must contact most borrowers by the time they’re 36 days delinquent.
  • Foreclosure cannot be initiated until a borrower is 120 days delinquent.
  • Servicers cannot begin a foreclosure while simultaneously working with a homeowner who has submitted an application for help.
  • This one’s novel: mortgage servicers must make sure that the people who take calls from borrowers are able to answer questions!
  • When asked, servicers will have to give homeowners who ask timely, accurate information about their foreclosure status.
  • If you fall behind on your mortgage, your servicer is required under the new rules to inform you of all options available to you.
  • When loss mitigation applications are rejected, servicers must explain why.

Who’s Going to be Hurt by the New Mortgage Rules?

According to real estate data provider CoreLogic, 12.8 percent of new mortgages in 2012 wouldn’t have met the Qualified Mortgage standard.

Peter Coy of Bloomberg speculates that “the people who are most likely to get rejected for a loan [under the new rules] are ones who live in states where housing prices are very high or where the bounce-back from the crash has been weakest. Also vulnerable are young people who are hoping to “grow into” their mortgages by progressing in their careers and winning raises.”

Are You in the Market for a Mortgage?

If you’ll be looking for a mortgage in 2014, do you expect the new rules to help or hurt you? And what do you think of the CFPB’s regulations? Are they unjustified intervention in lenders’ business or a rational regulatory response to lending gone wild?

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  • Travis Pizel

    We’re in the middle of a refinance….and are about to close so we are getting in ahead of the new regulations – which is good. One of the other changes is that while the current DTI is 45% (3% higher than it will be after 1/10), we still exceed that (due to our debt management payment until February) BUT banks have the ability to take into account compensating factors such as the fact that our financial picture is going to change shortly (or if someone has large cash reserves, a large down payment, etc). After 1/10, 43% is 43%….hard line in the sand. It’s funny…..we’ve been making our mortgage payment on time for 4.5 years while making a very large debt payment. But we wouldn’t have qualified to purchase the house we live in.

    • I don’t like the idea that discretion is being taken away from lenders. Sort of like mandatory sentencing. If we’re not going to allow discretion by judges, bankers, etc., then these people might as well be replaced by computer programs.

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