New Mortgage Rules; Friend or Foe?
Friday marks the launch of a new wave of
mortgage rules lenders are required to adhere to. The CFPB and Mr. Cordray stated “No debt traps. No surprises. No runarounds." However, I am not convinced these rules will
do anything to solve the past abuses they claim. Furthermore, I will show here the additional
problems and costs these rules will create for consumers. Funny, the CFPB is supposed to be protecting
the consumer, but it sure seems that is not the case.
Mr. Cordray and the CFPB also said Friday “The
new rules are designed to take a "back to basics" approach to
mortgage lending and lower the risk of defaults and foreclosures among
borrowers.” “No debt traps. No
surprises. No runarounds. These are bedrock concepts backed by our new
common-sense rules, which take effect today.”
So, the two components are known as
the QRM or Qualified Residential Mortgage and the ATR or Ability to Repay. Let’s look at the ATR first and break it
down. The CFPB lists the following 3
points regarding the ATR Rule and what it is meant to accomplish;
·
Lenders
must determine that a borrower has the income and assets to afford to
make payments throughout the life of the loan. To do so, the lender may look at
your debt-to-income ratio, which is how much you owe divided by how much you
earn per month, including the highest mortgage payments you would be required
to make under the terms of the loan. To calculate your debt-to-income ratio,
add up all your monthly obligations -- including student loan, credit card and
car payments, housing costs, utilities and other recurring expenses -- and
divide it by your monthly gross income.*
·
In
an effort to put an end to no- or low-doc loans, where lenders issue risky
mortgages without the necessary financial information, lenders will be required
to document and verify an applicant's income, assets, credit history and debt.
For borrowers, that means more paperwork and longer processing times.*
·
Underwriters
must also approve mortgages based on the maximum monthly charges you face, not
just low "teaser rates" that last only a matter of months, or a year
or two, before resetting higher.*
First, lenders have always adhered to
all of the above requirements, after 20 years in the industry I am 100% certain
of this. Yes, some lenders were breaking
the rules, so punish them not everyone else too. Lenders only factor in your utilities, bills
and income taxes (into your debt ratio or debt factors) when it is an FHA or
other government loan like a VA loan.
Conventional loans do not do this, period. No or low-doc loans were a product utilized
(and vital) for small business owners and self-employed borrowers who were
acting in a tax efficient manner.
Sometimes, when you are self-employed, you write lots of things
off. You do this to avoid excessive
taxes since you get few other breaks unless you are a large corporation. A few irresponsible companies exacerbated and abused these programs. Subsequently the government and the CFPB, who
are supposed to be helping the consumer (hence their name “The Consumer
Financial Protection Bureau”), banned these programs. I am certain any self-employed business owner
will tell you how helpful and beneficial this was.
Instead, these organizations could have
regulated the bad apples and increased compliance on these programs specifically
instead of banning them altogether.
The last bullet point is a doozy for
me. Apparently using these
calculations (that have always been used) the CFPB is going to save the day and
your payment will never rise again?
Hogwash people! Your insurance,
taxes and expenses for owning a home will perpetually rise. Maybe if we had rising incomes to match these anticipated and guaranteed rising costs over time, from owning a home, we would
not have to meet a standard that is adhered to by underwriters and lenders for
decades now. I for one see zero value in
any of this and most in the banking and mortgage industry agree. This is nothing more than the appearance of
action. This is the wrong direction and
in effect, will create greater lending expense (passed on to the consumer) and delays in obtaining mortgage financing.
So, what about the second component
the QRM Rule? Here are the highlights of
this proposed rule;
·
To
make sure you aren't taking on more house than you can afford, your
debt-to-income ratio generally must be below 43%. This rule is not absolute.
Banks can still make loans to people with debt-to-income ratios that are
greater than that if other factors, such as a high level of assets, justify the
risk.**
·
Qualified
mortgages cannot include risky features, such as terms longer than 30 years,
interest-only payments or minimum payments that don't keep up with interest so
your mortgage balance grows.**
·
Upfront
fees and charges cannot add up to more than 3% of the mortgage balance. That
includes title insurance, origination fees and points paid to lower mortgage
interest rates.**
Banks are not going to make a loan
with a debt ratio > 43% as bullet point one suggests. As the rule reads, if a lender does this, the
loan is not saleable to Fannie Mae, Freddie Mac or Ginnie Mae. This means the lender will be responsible for
this loan and unable to sell it to the aforementioned agencies. It will contain more risk which means more
expense (fees to consumers) to offset that risk. This means two things for consumers. One, rising costs for non QRM loans whose
expense will not be absorbed by a bank but passed on to consumers. Two, less availability of these programs
because banks do not want risk, they want loans they can sell off and remove
from their books i.e. a QRM loan.
The second point is also nonsense yet also has some value to it. First,
there are lots of situations where a borrower may need a loan with an interest
only option or a smaller minimum payment.
These features become valuable in short term relocation situations,
borrowers find themselves in, with their employers through relocation or promotion among many others. Situations
obviously exist where these features can be beneficial. I think this is on target by the creation of responsibility for the loan itself (on the part of the bank).
Banks can continue doing these loans, but will be forced to have
fiduciary accountability for the outcome of said loans over time. This is something that was not happening in
the past and is one valuable measure emerging from the Dodd Frank
implementation.
Finally, on the third point, I have
some real problems. Most notably the
inclusion of “points paid to lower mortgage interest rates”. These are typically known as discount points
and are used by borrowers to obtain a lower rate. Under the new rules if a borrower elects to
do this, they are not going to be able to go far, if at all, in buying down
their rate for the long term. If you
want to lower your rate let us say .50% (1/2 percent), the offsetting cost the
bank charges you to do that will nearly equal 1/2 the overall cost threshold of
the 3% rule. This rule says all of your
“closing costs” for your new loan cannot exceed 3% of the loan amount. So, here is an example.
If you have a $125,000 loan, the 3%
rule states your total closing costs cannot exceed $3,750. If you want to pay 1.5% in points to buy down
your rate say .5% (1/2 percent) from 4.5% to 4.0%, the cost would be $125,000 x
1.5% (discount points) = $1,875. This
only leaves $1,875 in closing costs (from the total 3% rule) that your lender and third parties can charge for their work in completing the loan.
This calculation can also be a detriment for borrowers who want to pay
their mortgage insurance up front instead of monthly. This too will have to be included in this 3%
calculation, thus making it extremely unlikely you will be able to obtain many
of the options from the past that create real shortcut value when obtaining
mortgage financing. If you combine
paying your mortgage insurance up front (less than paying monthly over time)
and buying your rate down slightly, you are in for limited options as a consumer!
One additional problem that arises is
that of lender paid closing costs on purchase transactions. Prior to today, a borrower could ask their
lender to charge a higher rate and use the additional points “Fees” to pay
their closing costs for them. This was
beneficial for folks who did not have a lot of additional funds to pay it “out
of pocket” or equity in their property to roll these costs in to the
transaction. If you want or should need
to take this approach now SORRY, it is not going to happen under these new rules!
Last, the icing on the cake. The bad, dirty and unethical people…the loan
officers! In quoting from the article, it reads like this “The rules also restrict "steering," or
practices that give financial incentives to loan officers or mortgage brokers
for pushing people into higher-interest loans that they can't afford -- a
practice that was all too common leading up to the housing bust.” I am certainly calling BS on this one.
Maybe a few loan officer were "Steering" people, but
most were not dragging people kicking and screaming into a loan they did not
want. You have to make a conscious decision to accept and sign for that
loan. Where is the culpability of the
consumer in all of this? Let’s pick on
the one person or group (loan officers) trying to make a living off 100% commission, no base
income or living wage support, trying to actually educate the consumer (for
what little goes on) and provide them the ability to choose the right
financing. Let us not blame the boss for
telling the loan officers, make your quota or you’re fired! Let’s not forget the fact that if lenders do
not offer all programs available to borrowers, they could go to jail and be fined
for discrimination.
What is troubling to me is that the
self-appointed CFPB (who answers to no other regulatory body except themselves)
has created rules which hinder the consumer and the lending and banking
industry. For me, this is just another
example of laws designed by folks who do not fully comprehend the industry in
which they create them. These groups
fail to recognize the implementation consequences (cause and effect) and the
disparate climate they create for consumers.
Let us also not forget the additional costs of implementing all of this
are going to pass right on down to you and I in the process. Today, I struggle to see how lending is going
to be better from any of this. It seems
to me it will be increasingly difficult to obtain financing through a more
laborious process while inhibiting options and increasing costs to
consumers. I thought this was about
“Consumer” protection not “Consumer” restriction?
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The KeneXsus Staff,
