Starting Friday, it will be a little bit harder to get a home mortgage. Or more precisely, banks and lenders will have to work a little bit harder to make sure borrowers can afford to buy a house, leaving some number of would-be homeowners out in the cold. And that's because Jan. 10, 2014, is the day that the new Consumer Financial Protection Bureau (CFPB) steps in to oversee the mortgage industry.
To understand the new CFPB rules that take effect today, you need to know two terms: Ablity-to-repay (ATR) and "qualified mortgage" (QM).
Ability-to-repay: This is a blanket rule requiring most lenders to make a concerted effort to ensure that the borrower will actually be able to pay off the mortgage. In practice, it means banks and other mortgage originators will have to look at more documents proving a borrower's income, assets, credit history, monthly expenses, and employment situation. If a mortgage defaults to a higher interest rate down the line, the lender has to consider the borrower's ability to repay at the higher rate. The idea is to keep banks honest and homebuyers out of mortgages they can't afford.
Qualified mortgages: A QM is a new standard the CFPB has created for loans considered relatively safe for borrowers. Excluded are interest-only and "balloon" mortgages, as well as ones that increase the amount you owe or exceed 30 years. Generally, any loan eligible to be purchased by Fannie Mae, Freddie Mac, and the Federal Housing Authority will be considered a QM, at least for the first few years. Other requirements are that the mortgage doesn't push your total debt load above 43 percent of your income, and originating costs can't exceed 3 percent of loans above $100,000. Lenders don't have to make QMs, but those mortgages are protected from lawsuits if the mortgage goes south.
Other rules prohibit mortgage brokers from guiding homeowners into more expensive mortgages for their own financial benefit, and require mortgage servicers to keep better records, be more responsive to their customers, call you if you're more than 36 days late on your home payment, and work with the homeowner to find a way to avoid foreclosure.
CFPB chief Richard Cordray calls the new rules "common-sense" solutions to the kind of risky lending that landed the U.S. in the 2007-08 housing crisis. They're good for banks and good for consumers, he argues in an op-ed, while conceding that they have spooked some segments of the real estate business:
There is a lot of misinformation out there about these rules. Our rules do not dictate who can and cannot get a mortgage. Lenders can make a loan to anyone as long as they reasonably determine that the consumer is in a position to repay. Down payments are still entirely up to the lender and home buyer. And we are not requiring loads of red tape: Lenders will likely ask a potential home buyer for proof of things such as income or assets — the kinds of things responsible lenders like our good community banks and credit unions have been asking for all along. [Cordray, via the Fremont, Ohio, News-Messenger]
On Wednesday night, he explained the new rules to The Daily Show's Jon Stewart:
Of course, not everyone will be pleased about these new developments. Even if these new rules are good for successful homebuyers and the real estate industry and even the country — Goldman Sachs estimates that about half of recent foreclosures could have been avoided if the QM rule had been in place earlier — that's cold comfort to people who will be frozen out of getting a mortgage. Nobody is really sure how many homebuyers that will be, but lower-income people, buyers in expensive markets, the self-employed, and workers whose income comes from tips or bonuses or hard-to-quantify sources are expected to face the biggest issues.
Real estate lawyer and author Shari Olefson predicts that "about 20 percent of people who have mortgages right now, will not be able to get qualified mortgages." That's at the high end of the estimates, though. The CFPB says that some 92 percent of mortgages being approved before Friday already met the QM requirement. Others put that number at closer to 95 percent — at least once lenders get comfortable with the new rules. Mortgage originators say they have voluntarily tightened standards on their own.
If anything, the CFPB is late to the game, said mortgage originator and CFPB skeptic Mark Greene. "It is the natural order of things in a market economy, that Adam-Smith-invisible-hand corrective forces emerge, and have in fact already changed the way mortgage lending is done," he wrote at Forbes.
Mortgage lenders have no appetite for loans that may go bad, the consequences are too far reaching, and the sins of the past are still warm and steamy.... Painful, unrecoverable financial lessons, severe enough to transform the entire mortgage lending industry, have already accomplished what the CFPB thinks it is only now accomplishing. [Forbes]
That may be true of some lenders, or even most lenders. But now there are rules that govern the entire industry. If some people don't get loans because of the CFPB regulations, well, that's a feature not a bug. "The rules may cut some credit [availability] at the margins, but as a whole they will ensure that borrowers have a product they can afford," CoreLogic economist Sam Khater tells The Washington Post. "The terms of the debate are always about access to credit, but it's also about access to sustainable homeownership."