New rules take effect on January, 10, 2014 for mortgage loans and refinancing which will limit people to overall household borrowing at no more than 43 percent of their income. Also, even tighter rules on documentation will be required. Mortgages are already eight times harder to get than years prior to the housing collapse. It may be a good idea to get that loan for a home now before the end of the year. The hardest hit most likely to young adults and baby boomers because of their low income even if they have high credit scores. Meanwhile, for those who can afford it half of all housing sales are made with cash compared with only 20 percent before the collapse.
Tighter mortgage rules will soon squeeze these groups even more
By Richard Satran | U.S. News – Fri, Aug 30, 2013 8:55 PM EDT
Five years after the housing collapse, the new Consumer Financial Protection Bureau
is closing the barn door on the loose lending that caused the crisis.
But as homebuyers struggle to get financing for new homes, some critics
fear the door could be permanently nailed shut for many people seeking affordable housing.
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.
Mortgage lenders
say the rules could make loans especially elusive for some classes of
borrowers, even those with strong credit scores. Baby boomers entering
retirement and young adults will feel a disproportionate impact because
of their lower income levels. (Related on USNews.com: Why Even Rich People Are Having Trouble Getting Mortgages.)
Based on interviews with mortgage lenders, real estate trade groups and market research firms, these groups are most likely to find borrowing more difficult when the rules take effect Jan. 10, 2014:
• Those who lost jobs in the
recession or have had career disruptions in the past five years.
Verification of job history and employment standing are key requirements
at a time when unemployment has been historically high.
The most populous U.S. state is among those most at risk: California, hit hard by foreclosures, still has some of the costliest U.S. real estate. Jumbo loan caps under federal housing guidelines have been reduced from over $700,000 to just above $400,000. In California, the average median home price was $352,000, up nearly 30 percent in a year, according the San Diego housing research firm DataQuick.
• Small businesses or independent contractors whose incomes fluctuate, or people who have chosen to shift into lower-paying jobs. This is one of the fastest-growing workplace populations. Recently divorced or widowed people could also face added scrutiny even if they are qualified to borrow.
• Retirees with adequate savings to finance home purchases or refinance. Lack of current income makes borrowing more difficult.
• Homeowners who wish to refinance but have lost some or all of their equity in the real estate bust.
• Those who live in regions hit by Hurricane Sandy, which have experienced sharp increases in flood insurance. Second-home and rental-property buyers are already having trouble getting financing in many areas. Newly designated Quality Mortgages will encourage lenders to seek more kinds of mortgage and homeowner coverage.
All told, 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.
"Some of the stringent guidelines
are going to mean that some very qualified borrowers will be turned
down. I do fault [the CFPB] for that," says Jordan Roth, senior branch
manager of GFI Mortgage Bankers, a New York-area housing lending firm.
"The landscape is being reshaped. But you will still search around and
find a lender if your loan makes sense."
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. The MBA estimates that loan originations will drop 10 percent this year, even before the new rules take effect in 2014.
How, then, is the housing market
recovering? Half of all housing sales are made with cash, according to a
new Goldman Sachs report, compared with just 20 percent before the
housing collapse. Those are not necessarily wealthy people who can
afford to buy homes without financing help. Some cash deals result from
foreclosure eliminations.
The CFPB
says it will monitor the housing market to see if credit has been
restricted too much by the new rules. Both congressional critics and
Federal Reserve members say they will do the same, since the Washington
policymakers are worried about putting more stress on a fragile housing
market so critical to the overall economy.
"It could turn lending into a cut-and-dried question about income," says Charles Dawson, a housing finance policy specialist for the National Association of Realtors. "But there are a lot of other things underwriters can consider in what makes a good loan."
The CFPB acknowledges that "there
many instances in which consumers can afford a debt-to-income loan
above 43 percent." Moreover, it says banks "initially" may be reluctant
to lend because of uncertainty over how to implement the rules. But it
argues that it is carrying out its Dodd-Frank legal mandate by providing
"bright lines for creditors who wish to make qualified loans."
In a vastly changed landscape, banks are skimpy and consumers frugal. That leads some critics to ask if the consumer agency
is "still fighting the last war." They fear the "bright lines" that the
consumer agency is using to guide risk-averse lenders may be too harsh
for the consumers the agency is supposed to help. The result could be
more expensive, harder-to-arrange loans for consumers, or outright
rejections for qualified borrowers. With interest rates rising, the
uncertainty is compounded for borrowers and lenders. In such an
environment, default could leap, and that could threaten a repeat of the
last crisis.
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