Real Estate & Mortgage Insights

New Mortgage Rules Finalized But Debate Continues

The Consumer Financial Protection Bureau released important new mortgage regulations in the middle of January, laying out the foundation of what "safe" home loans should now look like. And while the rules have put some lenders' fears to rest, others remain unconvinced that future housing bubbles will be prevented.

The Rules

Beginning now, mortgage lenders will have to make loans conform to the 'Qualified Mortgage' definition in order to sell them off to investors without having to retain a portion on their own books. A qualified mortgage will not include any specialty loans like interest-only, no-documention and balloon payment loans. They will also exclude mortgages with initial teaser rates, loans with terms longer than 30 years and loans with fees that total more than 3 percent of the mortgage. The new rules also focus on the borrower's ability to repay the loan. Lenders must now ensure that borrowers have enough income and assets compared to the size of their loan payments and related fees. Their debt-to-income ratio must also fall under a certain amount. If borrowers cannot meet all of these requirements, they may still be able to get a loan if their mortgage payments and other debts will not be more than 43 percent of their gross income.

The Debate

The CFPB hopes that the qualified mortgage requirements will essentially eliminate both lender and borrower appetite for risky loans like the interest-only and no-doc loans that helped way too many Americans get into homes they couldn't afford during the housing bubble. Those homeowners, by and large, were the ones who defaulted on their loans as soon as the bubble popped, bringing on the foreclosure crisis.

And there are plenty who are happy with the general outcome of the new rules. "We believe the rule will effectively block the return of risky product features and inadequate documentation. If it also provides lenders the certainty needed to originate qualified mortgages broadly across the market to creditworthy borrowers, it will have been a success," said Debra Still, chairman of the Mortgage Bankers Association, in a statement. She added, "this approach should allow lenders to offer sustainable mortgage credit to a great number of qualified borrowers without having to risk unreasonable and overly punitive litigation and penalties."

And the National Association of Realtors agrees. "The [NAR] applauds the Consumer Financial Protection Bureau for creating a broadly defined Qualified Mortgage rule that establishes strong consumer protections while ensuring continued access to safe, affordable mortgage credit," stated Gary Thomas, president of the National Association of Realtors. "...We will continue to work closely with the CFPB to ensure that the cap on fees doesn't restrict consumers' mortgage options, but believe today's QM rule is a positive step to bringing certainty to the housing finance system."

But not everyone believes that the new rules are in the best interest of consumers or the market.

"This is effectively aimed at taking away consumers' rights," said John Taylor, president of the National Community Reinvestment Coalition, referring to how consumers will be unable to sue over any 'qualified mortgage.' "What we're doing is taking an industry that just went through its darkest period in the history of American financial services and protecting them more."

Others worry that there are loopholes in the rules - like exemptions for home equity lines of credit and possible exemptions for small banks and credit unions - that will still allow homeowners to get in over their heads with housing debt.

The debate will continue to rage on as the logistics of the new rules come to light. The regulations went into effect January 21 and companies will be expected to be fully cooperating within the next year or two.

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