If you have not heard the news, new mortgage rules are coming in January and they are bringing some significant changes to the mortgage industry!
Financial institutions that originate mortgage loans with the intent to resell them on the secondary market will be forced to raise their underwriting standards for approving mortgage loans. The new rules released by the Consumer Financial Protection Bureau (CFPB) will affect banks, mortgage brokers and homebuyers. These new rules are expected to have an impact on the housing market.
The new rules are being put into place to avoid a repeat of the housing and credit crisis that we saw five years ago. Unfortunately, these new rules and regulations will make it more difficult for many middle class, hard working families to qualify for a home loan and could put a serious strain on those lenders who originate mortgage loans as a primary part of their business. It makes you wonder if these new rules will create a housing crisis of its own.
The new rules and regulations go into effect on January 1, 2014 and two of the primary changes causing some significant concern are the ‘Ability-to-Repay’ rule and the ‘3 percent test’ rule.
The Ability-to-Repay rule is also known as the Qualified Mortgage (QM) rule. A Qualified Mortgage is one that would be sold on the secondary mortgage market to a government-sponsored entity such as Fannie Mae or Freddie Mac. This rule states a borrower’s total debt liability, including their mortgage, cannot exceed 43 percent of their income. This means if a potential homebuyer has a car loan, a student loan and a credit card or two and now wants to add a mortgage payment to the equation, the total of all these payments cannot exceed 43 percent of their total monthly income. This could seriously hinder the average, middle-class homebuyer from qualifying for a mortgage.
3 Percent Test:
The 3 Percent Test rule is being put into place to limit the cost of obtaining a mortgage loan. The rule states the maximum amount of fees that can be charged to obtain a home loan cannot exceed 3 percent of the total mortgage amount if it is a QM to be resold in the secondary market. Every cost included in obtaining the mortgage must be included in this 3 percent rule. For example, a mortgage of $100,000 would be limited to a total of $3,000 in expenses. This could have a large impact on mortgage amounts between $100,000 and $200,000.
According to National Mortgage News, loan origination costs are expected to rise to approximately $5,900 per loan and are directly associated with the new complicated rules being required by the Consumer Financial Protection Bureau, Fannie Mae, Freddie Mac and the FHA that come into effect in January.
Rising home prices and higher mortgage rates have already lowered home affordability and pushed many potential homebuyers out of the market. The new lending rules will make it more difficult for a potential homebuyer to buy a home. It is estimated that only 1 in 5 people who apply for a mortgage under the new rules will qualify for a home mortgage. The impact will have the biggest impact on the average worker and could have a substantial impact on the Colorado Springs housing market.
While we heard the housing market has improved, much of what has kept the mortgage industry going has been the flood of refinances that came in when interest rates were low. Until interest rates started to rise toward the end of the summer, refinances accounted for most of the home loans. Since then, refinances have declined by 57 percent and currently make up just 65 percent of all mortgage loan applications. Even though rates have recently dropped again, mortgage refinance applications continued to drop.
While home purchases were on the rise until August, they have recently started to decline again. Is this a cyclical trend or has the affordability threshold been reached? Through much of the incline of the housing market, many home purchases were cash sales, not mortgage purchase sales. Recently, 33 percent of the purchases were cash sales, which is an abnormally high percentage. Home sales did fall in September and mortgage applications to purchase homes followed suit by falling 10 percent in the last month or so.
It will be interesting to see how mortgage lenders adjust to the new rules and what the impact will be to the home-buying market and the lenders. We will continue to keep you updated. Stay tuned for more updates.