January 10, 2013 / 10:10 PM / 5 years ago

YOUR MONEY-Will new rules make it easier to get a mortgage?

By Beth Pinsker
    NEW YORK, Jan 10 (Reuters) - In the market for a new home,
or looking to refinance? You might find it easier - and perhaps
cheaper - to get a mortgage, now that the Consumer Finance
Protection Bureau has established new regulations requiring
banks to meet detailed underwriting criteria.
    "This is probably the biggest mortgage rule the industry has
ever seen," says Guy Cecala, editor of Inside Mortgage Finance,
a trade publication. 
    Under the CFPB's new rules on what constitutes a "qualified
mortgage," banks will need to verify an applicant's income and
employment as well as ascertain that the loan being sought does
not exceed 43 percent of that income. ()
    Fee limits will be set, no more than 3 percent for points
and no rates more than 1.5 points above prime. Under the new
rules, a consumer cannot sue unless the bank has been remiss in
meeting its obligations as laid out by the regulations. 
    The rules go into effect in January 2014.
    None of this comes as a surprise to the financial industry,
since clarity on lending standards was set out in the Dodd-Frank
financial reform act of 2010. But now that the regulations have
been codified, here are some answers to key consumer questions.
       
    Q. Will I still be able to get a mortgage? 
    Consumers who meet lending standards will still be able to
get loans, while those who fall short will have their
applications turned down. That will not change, experts say. The
new rules make it too risky for lenders to stray from
guidelines, as that may leave them open to a lawsuit.  
    "Most of what is in the rule, the industry has been doing
voluntarily," Cecala says. 
    But the standards are now clear and on the books, says
Kathleen Day, a spokeswoman for the Center for Responsible
Lending. "You will know a 'qualified mortgage' when you see one.
It is a bright line. There is no ambiguity," she said.
    Speaking for the banking industry, Debra Still, chairman of
the Mortgage Bankers Association, issued this statement: "We
remain concerned that certain aspects of it could curb
competition, increase costs and tighten credit availability for
borrowers." 
    
    Q. Didn't banks always do underwriting? Why are rules
necessary? 
    The subprime lending crisis occurred after banks ignored
recommended underwriting procedures for higher-risk loans, known
as no-doc and low-doc loans, because less information was
required to get approval. High-risk subprime loans, made to
borrowers who didn't have enough income, also fit into this
category and came with high interest rates, or low teaser rates
that skyrocketed later on. 
    "It's crazy that we had to codify in law that lenders do
underwriting," adds Day, whose group has for years been
advocating for these changes. "But this is what we wanted, and
now it's there." 
    
    Q. Will there be any wiggle-room for lenders?
    Lenders might have some flexibility in the market for large
mortgages - the so-called jumbo market, where loan-to-income
ratios have been traditionally higher than for conventional
loans. Jumbo mortgages are typically above $625,000 in high-cost
areas.
    While these loans may be hard to come by for a while, banks
may find, over time, that the risk of being sued for making a
non-qualified mortgage is not so great, says Cecala.
    Day sees the so-called "safe harbor" for lawsuits as the big
win for the banks. The new rules allow borrowers to sue when the
banks don't meet the qualifying standard. (Day and other
consumer advocates groups were pushing for regulations to give
all consumers the ability to sue banks for not properly
underwriting a loan.) 
    "The win for us was that on the higher-cost loans - and
that's where most of the trouble was during the housing crisis -
those consumers will still have the ability to challenge their
lenders," Day says.
      
    Q. What's next? 
    Expect follow-up rules on the kinds of mortgages that can 
be sold in the secondary market. For example, the CFPB could
require that only loans with a down payment of 10 percent or 20
percent can be sold. 
    "We think there should be a down payment, but we don't think
the government should set it," Day says.

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