New mortgage qualification rules unveiled

Consumers wanting to buy a home could face slightly tighter underwriting guidelines by 2014 as mortgage qualification rules have been tweaked by regulators.

These new rules that impact whether someone can qualify for a home loan were unveiled Thursday (Jan. 10) by the Consumer Financial Protection Bureau, a watchdog group created by Congress

The qualified mortgage rule was mandated by Congress as part of the 2010 Dodd-Frank Act.

The guidelines for a qualified mortgage require lenders to make sure the borrowers are able to repay the loans and limits the debt-to-income ratio to 43%. This means a borrower’s total monthly debt payments can not exceed 43% of their gross pay.

Walt Fenton, mortgage lender with First Security Bank in Rogers, said some of the investors buying loans today in the secondary market permit up to 50% debt-to-income ratios in consumers with very strong credit ratings of 740 and higher.

Todd White, loan production manager at Arvest Mortgage, said the 43% rule will knock a few people out of loan qualification, even though they may be creditworthy with the ability to repay the loan.

Murray Harding, housing specialist at the Arkansas Finance & Development Authority, said the underwriting guidelines for the lower income loans in the state “HometoOwn” program allows for a 45% debt-to-income ratio.

White and other mortgage bankers hate to see an arbitrary number set, but would rather rely on solid underwriting protocol they say has been in place since 2008. The 43% cap ensures consumers are only getting what they can likely afford, according to the rule statement release by the CFPB.

Joel Doelger, spokesman for Credit Counseling of Arkansas, says 43% could be high for some families with children and large daycare bills.

He understands that the banking industry hates to see more regulation, but said, “more information for consumers will mean a healthier market in time." That said, Doelger adds that local mortgage bankers have always prescribed to a fairly conservative underwriting protocol.

“This was never the wild, wild, west, like other blazing hot markets, but clearly some lending restraint was needed and I think that has happened in the past few years,” Doelger said.

George Faucette, CEO of the local Coldwell Banker franchise in Northwest Arkansas, said regulations now indicated that the pendulum has already swung back and lenders are stuck with rigid rules for sometime.

“We know that after a crisis,markets tend to overcorrect and I am sure lenders hate to see tighter guidelines set in stone, particularly now that the housing market is finally rebounding nicely,” Faucette said.

The rules also require that all loans be fully documented with income verification. Bankers say this is already being done.

Interest-only and other exotic loans such as those with periodic balloon payments are not considered “qualified mortgages” and not eligible for purchase or guarantee by any federal housing agency.

One other aspect of the new regulation caps the origination fees on a mortgage at 3%, which has given some lenders and the Mortgage Bankers Association reason for concern.

“This is a very complex rule. We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers. In particular, the 3% cap on points and fees appears to be overly inclusive as it relates to compensation and affiliates. Loans with the same interest rate, terms and out of pocket costs should be treated the same under the rule regardless of the organizational structure or business model of the lender,” according to a statement by Debra Still, chairman of the Mortgage Bankers Association.

Still says the final verdict on this rule will be made by the market. In the meantime, it should effectively block the return of risky product features and inadequate documentation. It also provides lenders the certainty needed to originate qualified mortgages broadly across the market to credit-worthy borrowers.

On a negative note, the banking industry says if the result is a further tightening of credit as lenders have to pull back because of these rules it could through a wrench in the recovery housing market.