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January 14th, 2013 by Nick Timiraos
Regulators issued new mortgage rules last week designed to prevent a return to lending practices that helped crater the housing market and brought the financial system to its knees during the past decade.
Here’s a look at some frequently asked questions:
What is a qualified mortgage? Congress amended federal lending laws in 2010 to give greater legal rights to borrowers who get mortgages they can’t afford. The new law, part of the Dodd-Frank financial-regulation overhaul, said if banks made a qualified mortgage — one that meets certain easy-to-identify criteria — regulators and courts would presume lenders had reason to assume a borrower could repay.
When do the new rules take effect? In one year.
What is the Consumer Financial Protection Bureau’s role? Congress left it to the agency to spell out the definition of a qualified mortgage.
Do qualified mortgages have a minimum down payment or credit score requirement? No. Instead, the rules focus on documenting a borrower’s ability to make monthly payments.
What kind of loans won’t be qualified mortgages? Certain product types are excluded, including interest-only loans that don’t require principal payments, and loans where the principal balance rises over time. Beyond that, banks must verify a borrower’s income, credit, and employment. Borrowers who take out jumbo mortgages, or those too expensive for government backing, can have no more than 43% of total debt as a share of their pretax income.
Will lending standards get tighter, looser, or stay the same? It’s too soon to tell and there are diverse opinions on this point. David Stevens, the chief executive of the Mortgage Bankers Association, said the debt-to-income requirements for jumbo mortgages could tighten standards for those loans, which have already become much harder to get. “It will restrict credit on the margin over the current environment and that’s something we cannot afford,” he said.
Mark Zandi, chief economist at Moody’s Analytics, has said that the rules are likely to lock in today’s stringent income-verification and credit standards. That would keep in place a lending regime that many top policy makers, from Federal Reserve Chairman Ben Bernanke to Treasury Secretary Timothy Geithner, have said may be too tight.
Others say the rules should provide certainty that lenders have been craving and encourage them to ease their standards, though non-qualified mortgages could carry higher costs for borrowers. The new rules should help convince private mortgage investors “that it’s safe to come back in the water,” said John Taylor, chief executive of the National Community Reinvestment Coalition.
Will banks make loans that aren’t qualified mortgages? Lenders can make loans not considered qualified mortgages, but most say they won’t, at least initially, given the legal liability Fannie Mae and Freddie Mac are also unlikely to bundle such loans into securities.
Still, Mr. Taylor says that over time, a market should develop for non-qualified mortgages, “Where there’s money to be made, and where it’s clear that something illegal or predatory is not occurring, there will be a market for it because there will be a better rate of return.”
Will certain loans become harder to get? Yes. Many exotic mortgages that proliferated during the subprime heyday have disappeared; they are now less likely to come back. Lenders also may be more reluctant to make other loans that have been popular in more expensive housing markets and among affluent borrowers, such as interest-only mortgages.
Whether such loans will be securitized may depend on how ratings agencies interpret the potential costs of the new rules.
Are there certain lenders that will be at a disadvantage because of the rules? Most qualified mortgages will have a 3% cap on the amount of fees and origination costs that lenders can charge. Mortgage brokers are concerned that the way in which that rule is implemented could hurt their business model.
In addition, mortgage units run by home builders and real-estate brokerages could be hit because any costs from affiliated services that they offer—say, title insurance or legal settlement services—would count towards that 3% cap. If borrowers get those services from third parties that aren’t owned by the brokerage, then the costs don’t count towards the cap. Builders often encourage buyers to use their affiliated services, saying they’re more convenient. But consumer advocates have long worried that the practices are anti-competitive and can lead them to pay higher fees.
What happens if a borrower decides his loan is unaffordable? Borrowers can sue the lender or the mortgage investor for damages. Banks that prove they met the qualified mortgage definition will have a greater shield from liability for loans that carry a prime rate, and a smaller shield on high-cost loans, which are typically made to subprime borrowers.
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