Bureaucracy may move slowly but it does move. Years after the collapse of the real estate market and another year after its recovery, the Consumer Financial Protection Bureau came out with new rules last week intended to protect consumers from the mortgage industry. The new rules are intended to prevent lenders from making complicated loans that borrowers fail to understand will financially cripple then. Maybe not in the early years of the loan but more likely in years to come.
One key change is that lenders must qualify that borrowers have the ability to repay the loan. A major change is that the ability to repay the loan can no longer be based on early teaser interest rates, interest only payments, or less than interest payments as it was in the past.
Lenders must document and verify an applicant’s income, assets, credit history, and current debt load. No longer will no- and low-documentation loans qualify. It’s not a radical change but the new upper limit to a borrower’s monthly debt-to-income ratio is now 45%, up from the previous 43%.
Fannie Mae and Freddie Mac continue to back more than 75% of all mortgages. It’s their attitude that has changed the most. They will no longer accept borderline loans as they have in the past. This same attitude has flowed down to loan originators.
Neither lenders nor borrowers are likely to notice much change because most lenders have been operating under the new rules for the past 18 months. What is changing is that major banks like Wells Fargo, Bank of America, and JP Morgan Chase are preparing to make loans outside of the new standards. That will require the banks to hold the loans in their own portfolio instead of flipping them to Fannie and Freddie. You can be sure these loans will only be made to high net worth individuals.
This could revamp the mortgage industry in ways not yet clear. New private money may organize into a new system that operates outside of the new standards since there are many dependable people being blocked out of obtaining a mortgage based on the new standards. Otherwise, the new standards will be a drag on the housing market going forward. Right when the recovery was looking healthy.
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