It seems so obvious. You shouldn't qualify for a mortgage unless you can afford it. But in the years leading up to the housing crisis, it was common practice for some lenders to make loans without verifying the borrower's ability to repay. And we all know how that worked out.
New "back to basics" rules from the Consumer Financial Protection Bureau (CFPB) are designed to keep that from happening again by creating a safer and more flexible mortgage market. They cover underwriting and servicing of home loans as well as how struggling homeowners—including those facing foreclosure—must be treated.
Simply put, the goal is no traps, no surprises and no runarounds.
"As we saw in the lead-up to the financial crisis, common sense turned out to be not so common," said the CFPB's director, Richard Cordray, in a recent speech. "By bringing back these basic building blocks of responsible lending and servicing the customer, we will improve conditions for consumers seeking to enter the market and for all those who are still struggling to pay down their existing loans."
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But do the new rules go too far? Will they make it harder to get a home loan?
"Access to credit was already tight coming into the rule changes and this is going to make it just that much tougher, at least in the near term," said Pete Mills, senior vice president for residential policy at the Mortgage Bankers Association.
A new type of mortgage
The new rule creates a new class of home loans called "qualified mortgages." The CFPB says QMs are "safer and easier to understand" than many of the loans approved before the financial crisis.
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To be considered "qualified," a mortgage cannot:
- Have risky features, such as interest-only payments or negative amortization (which allows the principal to increase over time even though you are making payments)
- Be longer than 30 years
- Have, in most cases, a balloon payment at the end of the loan
- Have excessive upfront costs. QMs of more than $100,000 cannot charge points and fees of more than 3 percent of the loan amount
To be approved for a qualified mortgage, the lender must make a good-faith effort to verify that you can repay the loan based on your documented income, assets and debts. In general, borrowers must have a monthly debt-to-income ratio—including mortgage payments and other large debts like car loans—of 43 percent or less.
The lender also gets something out of this. By verifying the customer's ability to repay the loan, they get certain legal protections that make it harder for an unhappy borrower to sue.
The reviews are in
Consumer groups applaud the new rule. Carrie Johnson, senior policy counsel at the Center for Responsible Lending, said the rule "balances borrower protection with access to credit."
The people who sell homes also support it.
"I think they got most of it right," said Chris Polychron, president-elect of the National Association of Realtors.
Polychron told me he's sure the rules will clean up the problem of predatory lending and is hopeful they will broaden mortgage lending. If lenders pull back, "it would have serious consequences" to the housing market, he said.
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The Mortgage Bankers Association believes there are some good aspects to the rule, but also a lot of technical questions that still need to be answered. Until they are, Mills thinks lenders are going to be "very cautious, which could restrict access to credit for awhile."
"Self-employed borrowers are going to have a tougher time," Mills said. "The issues of income documentation become much more difficult when you're dealing with someone who is self-employed."
Mills said some of the burden is also going to fall most heavily on low-to-moderate income families, people who are just on the edge of qualifying for a qualified mortgage.
"If I have to make a close call, I'm now going to make the safe call," he explained.
The CFPB points out that more than 90 percent of the loans approved these days would qualify as QM loans, so the bureau does not see why its new rules would have a significant impact.
Can it really get any worse?
Credit is already tight. Could lenders really pull back even more?
"It's hard to imagine how much tighter lenders can make credit and still stay in business," said Barry Zigas, director of housing policy at the Consumer Federation of America.
Real estate expert Ilyce Glink, author of the book "Buy, Close, Move In," believes some people—those who can't afford it—will find it harder to get a mortgage. But, as she points out, that's the way underwriting is supposed to work. Higher standards should result in fewer mortgage defaults, which is good for both those who buy a home and the overall economy.
"In the short term, there might be some tightening of credit," Glink said, "but over the long run, it's going to be just fine."
The CFPB website has more information about mortgages and your rights under the new mortgage rules, including: new requirements for mortgage servicers, new options for people who fall behind in the loans, how to get help and how to file a complaint.