Homebuyers will have more difficulty qualifying for a mortgage, and financing a home purchase could be more expensive over time, as lenders adopt newly-introduced federal rules for mortgages, local loan officers say.
New mortgage regulations mandated by the Consumer Financial Protection Bureau went in effect this month. The rules are meant to hold lenders liable for bad loans and protect borrowers from loans they can’t afford.
The biggest changes for new homebuyers is proving they can afford a home loan, said Tim Mislansky, senior vice president and chief lending officer of Wright-Patt Credit Union Inc. Ohio’s largest credit union, Wright-Patt operates branches in Clark, Greene, Franklin, Hamilton, Miami, Montgomery and Warren counties.
Borrowers will have to show more documentation of income and assets, and lenders must document they reviewed an applicant’s credit history, Mislansky said.
Also, the federal consumer watchdog agency set a number for determining if a buyer can afford their mortgage payments, Mislansky said. The federal agency’s number — the debt ratio, or what percentage of monthly income is used to pay debt — is 43 percent. Debt includes payments on student and auto loans, credit cards, alimony and child support.
A loan to a borrower with a higher than 43 percent debt ratio is considered higher risk, Mislansky said. Before, there was no set number, and debt-to-income consideration was at the discretion of the lender.
“The issue that most lenders have is that 43 percent is kind of an arbitrary number,” Mislansky said. “Some folks who may have qualified in the past may have trouble qualifying in the future.”
Under the rules, the federal regulator created a set of loan standards. Mortgage lenders that originate a so-called Qualified Mortgage can sell them to the secondary market to buyers such as government-backed Fannie Mae or Freddie Mac. A qualified loan must be backed by Fannie or Freddie; be insured by a federal housing agency; and/or meet the 43 percent debt ratio rule, according to the CFPB. Interest only and negative amortization loans that were previously commonplace will not be qualified.
Lenders can still make loans that don’t meet the standards, but might not be able to sell these loans, which creates more risk for the lender. There are also exceptions for small lenders.
“I’d be worried that middle income Americans and lower income Americans” will be most impacted by the rules, Mislansky said. “If credit availability truly does shrink, that’s the group where it’s going to shrink. It’s not going to shrink on the wealthy or the upper class.”
The CFPB estimates roughly 92 percent of mortgages in the current marketplace meet the Qualified Mortgage requirements. The regulations put into law practices that most lenders have already adopted in response to the housing crisis, a spokeswoman with the agency said.
“Lenders can offer any mortgage they believe a consumer has the ability to repay, as long as they have documentation to back up their assessment. Not all loans will be Qualified Mortgages,” according to a written statement from the Consumer Bureau.
Other changes include a 3 percent cap on fees and points charged by lenders directly for qualified loans over $100,000, such as underwriting and processing fees. Fees for services not performed by the financial institution, such as appraisal fees, are not capped. But the cap does include charges from companies affiliated with the lender such as a title company.
Loan officers with two of the region’s largest home lenders — Fifth Third Bancorp and Wright-Patt Credit Union — see the overall regulations as positive steps. Financial industry practices that lent money with little proof of income, and adjustable-rate mortgages with interest rate spikes, led to an economic crisis beginning in late 2007 and 2008 when homeowners could no longer afford their payments.
“They’re trying to stem off the bubble from before where there was irresponsible lending years ago,” said David Gunn, head of mortgage for Fifth Third Bank’s greater Cincinnati affiliate, which includes Dayton and Springfield.
But it could be harder to obtain a loan in the coming months as heavily scrutinized lenders are extra careful rolling out the rules, Gunn said.
“It’s going to be a cautious lending environment at least initially,” Gunn said.
Big changes existing homeowners will see are monthly statements from the bank or credit union from which they got their home loan. This was not previously mandated.
Lenders now have certain obligations to meet with people having trouble paying their mortgages. For example, a foreclosure cannot be initiated before 120 days of default and during that time, lenders are to work with homeowners on loan modifications or refinances to keep them in their home, according to the CFPB.
Other rules require lenders to fix issues quickly and credit payments quickly.
The cost of implementing the new rules, which require bank and credit union updates to policies, procedures and software, could make mortgages more expensive as costs are passed on to consumers via loan rates and fees, Gunn said.
“The additional cost to comply for banks I think invariably has to go somewhere,” Gunn said. “Implementing these can be expensive.”