New and tougher mortgage standards will be here in just a few weeks, financial norms that are causing the home loan industry to shudder and quake.
“Have a series of post-crisis over corrections turned into actions to the detriment of responsible, qualified borrowers?” asks David H. Stevens, President & CEO of the Mortgage Bankers Association.
“Policymakers,” says Stevens, “have now gone too far in correcting for these mistakes, shutting out many in the very communities they claim to be defending.”
Can this be true? Are looming mortgage regulations set to end the real estate hopes shared by millions of prospective homeowners?
It’s difficult to see what the fuss is about. New mortgage regulations will require that lenders verify the ability of borrowers to repay their loans, but this hardly seems like an unfair or unreasonable requirement. It does mean an effective end to most ‘no doc” and “low doc” loan applications, but so what? For decades lenders required fully-documented loan applications and the housing market expanded nicely and with little risk to borrowers, lenders or investors.
Another standard that has lenders up-in-arms are the “qualified mortgage” requirements created under Wall Street Reform. The basic arrangement is this: If lenders make qualified mortgages they are virtually immune from lawsuits. This is a very big deal because in recent years lenders have shelled out more than $100 billion in legal fees and settlement payments.
So what is a qualified mortgage? There are a bunch of rules but in basic terms a qualified mortgage is an FHA, VA, conventional or portfolio loan that is originated with a fully-documented loan application, where the interest rate is not more than 3 percent above the Average Prime Offer Rate (APOR), where points and fees do not exceed 3 percent of the loan amount and the loan term is not greater than 30 years. Negative amortization is banned, balloon notes are prohibited, and borrowers cannot devote more than 43 percent of their income to housing costs.
Notice what’s missing? No option ARMs. No interest-only financing. No loans without documentation.
The argument is made that the new rules will limit the ability of those with marginal credit to get subprime loans (because of weak credit) or jumbo mortgages (because such financing options sometimes start out as interest-only loan products and also because borrowers may devote more than 43 percent of their income for housing payments). As Stevens explains, “in our effort to be diligent in the face of a collapse in the housing market, policymakers all over town have been making hundreds of policy decisions to clamp down on risk, decisions that may make sense in isolation but in the aggregate are choking off credit.”
But is credit really being choked? The Mortgage Bankers Association says loan originations are expected to fall 32 percent in 2014, but not because loan standards are becoming tougher. Loans to finance home purchases are actually expected to rise 9 percent while refinancing will fall 57 percent. Why the drop-off in refinancing activity? Think about where loan rates have been for the past few years and the record lows seen in 2013. What is the incentive for the millions of borrowers who have recently refinanced to get a new loan at a higher rate?
One claim repeated widely is that borrowers will be required to have 20 percent down under the new regulations — and that such a requirement will stifle the housing market as well as the national economy. If this claim were true it would be a concern but it is simply wrong for two reasons. First, FHA and VA loans are qualified mortgages, forms of financing that require little or nothing down. Second, Greg Hernandez, a spokesman for the Federal Deposit Insurance Corporation, tells RealtyTrac that there are no down payment standards under the qualified mortgage rule and thus no requirement for 20 percent in cash up-front.
The truth is that most lenders are already following the new guidelines. A recent study by ComplianceEase shows that 80 percent of the loans now being made actually qualify under the 2014 standards.
If the rules set for next year are so onerous why are so many lenders already in compliance? The answer is that the new rules actually make a lot of sense. They hold down risk which means they reduce foreclosures and short sales, horrid financial events that knock down lender stock values, reduce profits, damage neighborhoods and harm families. In contrast, meeting a few common-sense rules hardly seems like much of a burden.