The new mortgage rules are due to take effect on January 10 next year. While there are concerns they may affect lending, a new white paper released by Core Logic has pointed out that they'll help to build private investors’ confidence in the secondary market.
According to the article Inman News, these new rules should form the first steps required to encourage increased private capital investment in housing finance. It's anticipated that the introduction of the rules should provide a firm foundation on which investor trust can be built on over time.
The introduction of the new rules was announced earlier in the year, and mortgage lenders will have to evaluate borrowers on eight different underwriting factors. These factors include the borrower’s assets, income, their credit history and the monthly payments on the mortgage, and are designed to help ensure borrowers don't take on too much debt. Some non-profit and community based lenders who often deal with low to moderate income homebuyers are exempt from these new rules.
When the rules come into effect, they will mean a qualified mortgage will meet specific points, in that it cannot include certain risky features such as interest only payments, terms that exceed thirty years, loans with a balloon payment at the end or negative amortization payments. As a temporary measure, loans with debt to income ratios that exceed 43% will be considered to be qualified provided they conform to the underwriting requirements of government sponsored enterprises. These include loans through the Rural Housing Service, or the Department of Agriculture, Fannie Mae or Freddie Mac, the Department of Veterans Affairs, and the US Department of Housing and Urban Development. Mortgage lenders will still be able to agree to non-qualified mortgages, but meeting the new guidelines will provide them with some protection against lawsuits.
These new rules are being introduced in response to the financial crisis in 2008, which came about due to the easy access to credit, which in turn created an unsustainable increase in house prices. One of the problems with the previous system is that lenders often agreed to the loans without taking into consideration the borrower’s ability to repay the money as the loans were then bundled up into securities that were sold to investors. When the housing market collapsed, most private investors withdrew from this secondary market. As a result most loans are now government backed. The government now hopes to encourage private capital back into this market through good business practises such as those being introduced by these rules.