“You’ve heard all the stories about how difficult it is to get a mortgage and all the documentation required -- there’s going to be a lot more of the same,” said Ron Haynie, senior vice president of the Independent and Community Bankers Association.
A slew of new mortgage regulations will take effect between Jan. 10 and Jan. 20 next year. The most noteworthy of these for borrowers is the ability-to-repay rule and the qualified mortgage, or QM, rule, which together establish new standards and practices for mortgages that lenders must follow.
While not every loan has to be a QM loan, lenders have a good reason to make them that way: QM loans, when done right, shields lenders from legal liability if loans sour, said Bob Davis, vice president of the American Bankers Association.
Although many mortgages today already meet the new QM standards, about 20 percent don't, Davis
estimates. Those could no longer be available next year as lenders get skittish
about making non-qualified loans.
QM loans prohibit a number of mortgages that were generally bad for consumers, including "balloon," interest-only and negatively amortizing loans. The new rule also limits the "points" -- the fees or prepaid interest on a mortgage -- to just 3 percent of the loan’s value. They also set qualifications that borrowers must meet, and that’s where the mounds of paperwork comes in.
Lenders will be looking at a borrower’s income and assets, current employment, the would-be monthly mortgage payment with interest, any other additional mortgage payment such as a second lien, the monthly payment of other mortgage-related obligations such as property taxes and homeowner’s insurance, current debt, monthly debt-to-income ratio and credit history.
The rules also set a standard debt-to-income ratio of 43 percent that all borrowers must meet. That means that your current monthly debt payments -- credit cards, auto loans, student loans -- and your monthly mortgage payments cannot exceed 43 percent of your monthly gross income.
“By putting that line in the sand of 43 percent, there will be people who are probably very good credit risks, but because they’re over that 43 percent threshold they won’t get a loan,” Haynie said. “That’s going to be tough for some folks.”
The upshot: Low- and middle-income borrowers, self-employed people whose income varies and anyone weighed down by debt may find it more difficult to get a mortgage.
What if you don’t qualify?
There is, however, a silver lining for those who don’t qualify for a QM loan. Fannie Mae and Freddie Mac will still accept non-QM loans, so as long as lenders craft loans they can sell to the housing finance agencies. That means borrowers who doesn’t meet all the QM standards can still get a loan.
“There will also be some lenders that will make loans that will not be considered QM, but initially they’re going to be extremely cautious,” Haynie said. “It’s an unknown risk until that ability-to-repay action from the borrower hits the courts, and that won’t happen any time soon.”
Lenders will have to see how court cases play out when a borrower that defaulted claims in court that the lender did not follow QM and issued a bad mortgage.
“Since there is substantial new liability if they get it wrong, the way banks will protect themselves -- all lenders, really -- is they will be a little more conservative in their underwriting,” Davis said.
Lenders are likely to exercise the greatest caution in the first six months after the rules take effect, as firms grapple with new computer systems and train staff to company with the regulations, Davis said.
Not everyone in the real estate industry expects the news rules to restrain lending. Stan Humphries, chief economist at Zillow, thinks the QM rules will have no effect on the real estate market.
“As [interest] rates rise, lenders are going to loosen standards in order to
attract customers,” he said, adding that the dip in refinancing in recent months means lenders need to find new customers to fill
Humphries also pointed out that most mortgages today are backed by Fannie or Freddie. However, even though the two are exempt from the rules, the Federal Housing Finance Agency directed the pair to limit their purchases to qualified mortgages, though they will still accept loans that exceed the 43 percent debt-to-income ratio.
The rules also do not dictate standard acceptable credit scores or loan-to-value ratios, so there is still wiggle room for lenders to loosen their standards next year.