The Consumer Financial Protection Bureau is further tightening the requirements for mortgages effective Jan 2014. The new lending rules will limit people from taking out a mortgage or refinancing an existing one that puts their overall household borrowing at more than 43 percent of their income. That new debt cap also includes a wide swath of common forms of debt that count toward the total, including student loans, most fees and points related a home purchase, and property taxes. It also tightens rules on documentation, and lenders who improvise to give customers easier terms will be open to consumer lawsuits if the loans go bad. This is similar to what was levied against the appraisal industry where appraisers are now open to lawsuits if negligence or misconduct can be demonstrated.
“It will tighten things further. The largest constraint is the 43 percent threshold,” says Sam Khater, senior economist at housing data provider CoreLogic. “It will hit more refinances than purchases because a lot of them use a high debt-to-income ratio. It will also hurt home borrowers in distressed environments.”
This is coming as the mortgage market reacts to a jump in rates. While still historically low, the public had grown accustomed to the often under 4% rates and those are gone. Expectations for rates to end up in the 5% – 5.5% range by spring coupled with Washington’s talk about taking their hands off real estate has many worried. Many in the industry are moving away from calling the real estate market recovered; many are saying that the 2013 bump had to happen as the market had really nowhere to go but up. But with rising rates, further lending restrictions and Washington trying to get out “carrying” the mortgage market, many are apprehensive about the spring ’14 market.
Private research firms say that from 10 percent to 50 percent of borrowers who now qualify will lose out. The CFPB, which authored the new rules, concedes that more borrowers will be rejected. But the consumer agency says the people who fail to reach Qualified Mortgage, or “QM” status, tend to be either “very marginally qualified” low-income borrowers or wealthier ones with private lending alternatives, and the exclusions amount to less than 10 percent of those currently eligible. Critics point out that the new lending rules are being introduced into a home finance market that is barely functioning as it is. Loan originations have dropped to an annual rate of about $500 billion a year from $1.5 trillion before the housing collapse, according to industry data. Mortgages are already eight times as difficult to get now than they were in the years prior to the housing collapse, the Mortgage Bankers Association says.
These actions are simultaneously laudable and puzzling; the effort is to make more responsible loans while at the same time the administration coddles the “too big to fail” banks, pours billions of dollars into modifying mortgages despite an almost 50% redefault rate and pushes lenders to loosen lending standards to those with weak credit. It will be an interesting spring market to say the least.
Hank Miller, SRA
Associate Broker & Certified Appraiser
Atlanta Communities Real Estate