New Rules For Borrowers Seeking a MortgageEarlier this month the Consumer Financial Protection Bureau (CFPB) announced several changes surrounding mortgage proceedings.
Mark Skinner, Mortgage Originations Manager at IBM Southeast Employees’ Federal Credit Union (Boca Raton, FL) details the new rules and how they will impact the industry. “For over a year the Consumer Financial Protection Board (CFPB) has been working on new rules that are designed to protect consumers and help prevent another real estate / financial crises like the one we experienced in 2007.”
He says that the new rules address three topics including ability to repay, escrow requirements, and high-cost loans and home ownership counseling. Certain areas of each rule will go into effect at different points over the next few years. “804 pages on ability to repay and 431 pages on high-cost and home ownership counseling rules go into effect January, 2014. However, on June 1 of this year the new 116 page rule for escrow requirements will go into effect.”
New Mortgage Ability to Repay RuleSkinner believes the ability to repay rule will reshape the types of mortgage loans being offered in the near future. “The ability to repay rule lays out eight basic requirements to determine the borrower’s ability to repay the loan and defines a ‘qualified mortgage.’ A qualified mortgage provides lenders with a presumptive safe harbor regarding the borrower’s legal options if the borrower defaults on mortgage loan payments.” Underwriting requirements on mortgages made to Fannie Mae, Freddie Mac, Veterans Administration, and Federal Housing Administration are exempt from this rule for at least the next seven years.
He adds that the ability to repay rule also limits the borrower’s total debt payments to 43%, which for decades has traditionally been 45% for most lending institutions. “What this means for a family with a $60,000 annual income is their mortgage payment plus car, credit card, and other monthly obligations cannot exceed $2,150 a month. In determining the 43% debt to income ratio, the mortgage payment includes the principal and interest payment plus 1/12th of the yearly tax and insurance payment amount along with any home owners association payment as computed to a monthly amount if it is paid quarterly, semiannually or annually.”
Because interest only, balloon, negative amortization and loan terms greater than 30 years are not considered to be qualified mortgages, Skinner predicts that they will become scarce or even extinct. “Additionally, I envision that additional disclosures and or acknowledgments will be required at loan closing to attest a borrower loan as a qualified mortgage. The lender will also be required to maintain the evidence of the borrower’s ability to pay for three years.”
New Mortgage Escrow Rule“On the escrow rule, borrowers of non-qualified mortgages will be required to escrow taxes and insurance payments for five years instead of 12 months, which is the current requirement,” Skinner says. “The instance of a non-qualified mortgage that occurs most frequently are borrowers that obtain fixed rate equity loans. Equity loans typically have higher interest rates than standard first mortgages but many lenders pay the closing cost associated with an equity loan, which can make that loan more attractive.”
Additionally, equity loans enable consumers to borrow money when they don’t meet the credit requirements of a standard first mortgage. In some cases, an equity loan’s annual percentage rate will require the borrower to escrow their tax and insurance payments even if they are not escrowing on their first mortgage.
Still unsure how the new mortgage rules will impact you? Contact a mortgage professional for more information.