New mortgage rules: What they mean for you

Effective Friday, rules from the Consumer Financial Protection Bureau will create a safer mortgage market. Simply put, the goal is no traps.

By MSN Partner Jan 10, 2014 11:59AM

Image: Mortgage due © Hemera Technologies, JupiterimagesBy Herb Weisbaum, CNBC


CNBCIt 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), which took effect on Jan. 10, 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.


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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."


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.


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.

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.


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Tags: loans
Jan 13, 2014 12:15PM

There is a HUGE misconception that the maximum debt-to-income ratio is now 43% in order to get a loan. This is simply not true. Allow me to point out two things regarding this 43% DTI rule:

1.) Lenders do NOT have to make "qualified mortgages", but if they do, then they are in a "safe harbor" from a legal standpoint. Because of this, most lenders will choose to only originate qualified mortgages.

2.) The vast majority of loans are currently funded using software that was developed by Fannie Mae, Freddie Mac, or USDA. These software systems "grade" the loan scenario, and most lenders aim to only fund loans that receive the best risk grade available per the software system used. As long as these software programs (DU, LP, and GUS) grant the target "approve / accept" response that most lenders require anyways, then there is no limit to the debt-to-income ratio (meaning DTI can be above 43%).

Jan 12, 2014 5:03AM
don't worry Odummo will find a way to tax us more to help everyone out
Jan 12, 2014 1:33AM
Mortgage.  Another name for slavery.
Jan 12, 2014 1:31AM
Money is the root of all evil.  Banks are the leaders in all evil...
What's in your wallet...?  lmfao.

Jan 11, 2014 6:10PM
I think a lot of people purchasing for the first time didn't take into account that things go wrong in a house.  Water heater goes out, you purchase a new one, not the landlord.  Also many people had things like heat and trash covered in their rent, but now they are responsibe to pay for these bills.

Jan 11, 2014 4:36PM
Part time jobs, health insurance premiums doubling, is some how going to put the economy into warp drive.  The housing market will be in overdrive to keep up with the demand.  The lines will be so long to purchase a new house or car, you best make an appointment to see a car salesman or realtor.
Anyone with a PhD in Mother Goose knows it's all true.
Jan 11, 2014 2:43PM

Uhhh wait didn't the Mortgage Bankers Association default on their their building back in 2010!?

 "On Friday, CoStar Group Inc., a provider of commercial real estate data, announced that it had agreed to buy the MBA's 10-story headquarters building in Washington, D.C., for $41.3 million. The price is far below the $79 million the trade group says it paid for the glass-walled building in 2007, while it was still under construction. The price also is far below the $75 million financing that the MBA received from a group of banks led by PNC Financial Services Group Inc. to finance the purchase."


Jan 11, 2014 11:48AM
If you can't afford a home you should not be able to get a loan. Save 20% down and you won't have a problem.
Jan 11, 2014 11:35AM
Another useless law that really won't help anyone.  How about looking at the millions who lost jobs or had income reduced and suffered damage, temporary damage, to their credit and now (because of government rules) are locked out of the housing market for 3,5,7, or even 10 years even though the one time event is long past?  Anytime the government imposes rules that remove human judgement from the equation it just makes problems.
Jan 11, 2014 11:08AM
The filthy rich are going to ruin this God given beautiful country come hell and high maw would say...
One loan at  a time.

Jan 11, 2014 10:59AM
All of us self employed chiselers could not get mortgages since 2008.  I know I have tried and had to come up with my own cash in order to buy investment property.
Jan 11, 2014 10:40AM

Banks need to ease lending guidelines so more people can buy houses.   The younger generation are not deadbeats like the older generations is.

Jan 11, 2014 10:22AM
Looks like all the self-employed tax chislers who only report half their true income will get their comeupance now when they have to provide their income tax return to the bank to prove their income.  Sorry guys, no mortgage from the bank now if you can't prove sufficient income on your tax return to manage the monthly payments.  
Jan 11, 2014 9:36AM

I think your income listed for the loan documentation should consist solely of your previous years taxes.  As seen in this article, it does not seem like they are changing that much with respect to people falsely claiming more income that they really generate - simply they have to sign a good faith document?  Please.  How many people making 47K a year will say they make 50K a year or more when they don't?  The lax borrower income fact checking by the banks started the whole process to begin with until it got to a point they never checked at all if you had equity ready to go with the house you were about to buy. Banks knew it, gambling that if you went in default, they could take it over at a higher value. But everyone got caught with their pants down.

Therefore, I don't see this plan making a major impact.

Jan 11, 2014 9:21AM

In the past the home were way overpriced.  This only benefited the builders, investors and banks.  They had to sell them so they did whatever it took to sell them.  I worked for a builder so I saw first hand what was going on.  Everyone was working and most had 2 income households but as soon as the market went bad and people lost their jobs no more affording these crazy loans.

In reference to an earlier post - Anyone who says they could not get a loan but they had $450k in the bank to pay cash for a house is lying.

Jan 11, 2014 9:07AM
43% debt to income ratio is going to kill the investments of the people who invest in real estate. Why? Why is everything geared to the rules for the general public without consideration for individual success or failure??? This is just another part of the coming socialism. "If it is good for the masses, it is good for exceptions".
Jan 11, 2014 7:35AM
 And the millions who make up the lowest labor participation rate since 1978>?
Jan 11, 2014 7:08AM

How can I buy a house without a loan?   This law will hurt the middle class.

Jan 11, 2014 3:00AM
Well it looks like everybody will have skin in the game now...not just the Barney Frank gone?
Jan 10, 2014 11:45PM
why is it the banks fault -- sure in some instances the banks were convinced by the consumer to lend them money -- however isn't the consumer equally if not more at fault as they knew their circumstances better than any lending officer.
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