If you are a buyer and haven't spoken with a lender in the last few months you may be in for a surprise.... or not depending on the size of your bank account. As of January 10, 2014 the guidelines for obtaining a real estate loan changed... or at least they were supposed to change. The changes are courtesy of the
Dodd-Frank Consumer Protection Bill signed in 2010 that was basically designed to curb Big Banks and get the FEDs out of the mortgage business. The thought was that if lenders didn't follow certain rules they could be sued by consumers if the loans can't be repaid.. If they do follow the rules then they have created a "safe harbor" and can't be sued if the loan goes bad. For some strange reason the government seems to think that big lenders will be more concerned about possible consumer lawsuits than making large profits using risky business practices.
In order to have a safe harbor banks/lenders must follow a few basic rules which will create a QM or qualified mortgage:
1. The borrower must be able to repay the loan... ( Really?)
2. The loan payment must be fully amortizing ( no interest only loans or balloon payments)
3. Total household debt including mortgage payments can't exceed 43% of the borrower's gross income.
4. Points and fees can't exceed 3% of the loan amount ( does not include most normal closing costs)
5. Loan term must be 30 years or less
6. Loan amount can't exceed conforming loan limits for the area ($625,500) for high cost areas)
7. All assets, income, debts etc must be documented verified in writing. ( no no doc loans)
8. Borrowers must receive copies of all appraisals.
However as with all things that are government generated there are exceptions and wording that can change the final product. There are words like
presumed and
good faith effort sprinkled through out the documents. Also of note
there are no down payment or credit requirements which doesn't make much sense if the intent is to make a loan only to folks who can repay the mortgage.
While lenders may point to the new rules the reality is that not much has changed. for many banks and direct funding lenders. . I spoke with one representative of a major local lender and they are not seeing any huge changes in the way they are packaging loans...
The above guidelines will affect folks who are looking for a conforming loan. However borrowers who need a jumbo loan may have more leeway.... especially if the banks are going to in-house the loans. Some major lenders have programs in place for their
high-net worth clients who have accounts with them that include interest only loans and other products that don't quite meet the above regulations. Wells Fargo, Citi and other big banks are still making interest only loans as well as other loans tailored to their more affluent clients. In an
article from the Wall Street Journal on March 7, 2014, Al Yoon gives an accurate accounting of the reality of post Dodd-Frank.
These guidelines may also create an unintended market with hard money lenders who will make loans not meeting the guidelines at a significantly higher interest rate than available in the primary market. This may well affect many homeowners who need to refinance their current loans and don't quite fit the mold.
Also it would have been nice to set up a few guidelines for the self employed to make it slightly easier for these folks to obtain a loan. If you are self employed obtaining a loan in the last few years has been almost impossible unless you are extremely wealthy. Just because you don't get a W-2 doesn't mean you won't repay your loan.
Just to make it more interesting we see rates rising as the FEDs cut back on their purchases of MBS funds over the next few months. While I don't think the increase will be huge, even .05%-.075% in mortgage rates will have an effect on the market. Current rates are running 4.5% on jumbo conforming loans to over 5% for nonconforming jumbo loans. While rates are still at historic lows, higher rates coupled with major price increases in many markets may change options for a number of potential buyers.
