The Mortgage Corner

The new rules coming into effect in January 2013 for most conforming loans—i.e., those guaranteed by Fannie Mae and Freddie Mac will cause a definite drop in mortgage lending. The Consumer Protection Financial Bureau, created under Dodd-Frank has labeled such mortgages as Qualified Mortgages.

Financial institutions in the business of originating mortgages that they plan to resell on the secondary market to government-sponsored mortgage buyers Fannie Mae and Freddie Mac will have to raise their standards for approving loans. That is likely to have the biggest impact on working-class families, many of whom are struggling with consumer debt and are living paycheck to paycheck.

Two of the most important new rules created by the Consumer Financial Protection Bureau related to housing are the Ability-to-Repay rule and the 3 percent test rule.

The Ability-to-Repay rule, also known as the Qualified Mortgage rule, says borrowers’ total debt liability — including housing — should not exceed 43 percent of income. A Qualified Mortgage is one that would be qualified for resale on the secondary mortgage market.

Yet borrowers with up to 50 percent total debt liability (DTI), excellent credit and savings that qualify today, would be excluded. And other rules, such as no interest only programs, no more than 30-year amortizations, lower debt-to-income qualification levels, and perhaps lower maximum loan to value amounts, will severely restrict homeownership.

So the regulations also could have the unintended effect of making it more difficult for many working-class families to qualify for mortgage loans offered by major banks, as an example. This is because higher income is required, hence such families will qualify for lower-priced homes.

The 3 percent test rule says 3 percent of the mortgage amount is the maximum amount of fees that banks can charge a borrower in order for the home loan to be classified as a Qualified Mortgage that can be resold in the secondary market.

"If you are a bank that pretty much originates and sells your mortgages, you are now playing under these rules," said Ernie Hogan, executive director of Pittsburgh Community Reinvestment Group. "If you are a bank that originates mortgages but keeps them and holds them for 30 years, you can vary from some of these rules."

Mr. Hogan believes this rule will make lower-priced homes more expensive for banks because they will not make as much money on that kind of business.

"It will hurt working-class families buying homes for $75,000 or less," he said. "Those loans will be classified as a high-cost loan. You are going to lose people in the mortgage industry looking at that segment. That’s what we think will happen. Banks will make a better spread on higher-priced homes."

Don Frommeyer, president of the National Association of Mortgage Brokers, said the 3 percent rule also will be a problem for mortgage brokers. He said brokers will have a harder time collecting their fee on homes priced below $160,000 because every cost to the customer in the home buying process goes toward the 3 percent. For a mortgage of $100,000, for example, all origination fees — including the mortgage broker fee — would be limited to a total of $3,000.

This will also mean a step backward in the incipient housing recovery, as qualification standards were already tightened by the Federal Reserve last year for conventional loans guaranteed by Fannie and Freddie, in an attempt to lessen mortgage fraud and predatory lending practices.

But predatory lending wasn’t much of a problem before subprime loan programs were introduced in early 2000 that were basically liar loans, with little or no attempt to verify incomes and assets. Conversely, loans underwritten to Fannie Mae and Freddie Mac standards have never had this problem, with default rates not much higher than historical averages since the housing bubble.

So there is conjecture that a major reason for even more restrictive rules is an attempt to get Fannie and Freddie, now wards of the government, completely out of the mortgage purchase and guarantee business. But who then would be left, since they have been guaranteeing more than 90 percent of all mortgages originated since the end of the Great Recession. Need we say any more restrictions on them could step this real estate recovery in its tracks?

Harlan Green © 2013

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