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Nancy Starczyk:New rules aim for safer loans

Posted: January 15, 2014 2:00 a.m.
Updated: January 15, 2014 2:00 a.m.

 

Federal rules that went into effect Friday, Jan. 10, provide homeowners and consumers shopping for a home mortgage new rights and greater protection from harmful lending practices, while also probably slowing the pace of home price increases and forging a stronger, more stable housing market.

The rules should eliminate or sharply reduce the delays, runarounds, and painful shocks that hurt millions of homeowners during and after the financial crisis known as the Great Recession.

A new class of loan called “Qualified Mortgage” along with “Ability-to-Repay” rules developed by the Consumer Financial Protection Bureau eliminate risky practices that contributed to the economic collapse — such as, so-called liar’s loans using no- or low-documentation, negative amortization that allowed a loan’s principal to grow even as the borrower made payments, and interest-only loans where a consumer does not pay down the principal.

The hope is that the tighter rules will take the housing market back to the future — a new era of safer mortgages and fewer surprises.

Under the new rules, virtually every mortgage a lender makes must now be evaluated based on a borrower’s ability to repay that loan.

“That means the borrower should be able to repay the loan for many years, not just during the first few months when an initial “teaser” interest rate may keep the monthly payment low,” the CFPB noted in a statement announcing the new rules.

The CFPB rules also define a new class of mortgages — called “Qualified Mortgages” — for which borrowers who qualify are presumed to be able to repay. QM’s are designed to be safer and easier to understand than many of the loans consumers got in the lead-up to the financial crisis.

QM’s will have three primary features:

• A QM is a loan a borrower should be able to repay. In general, the borrower must have a total monthly debt-to-income ratio including mortgage payments of 43 percent or less.

• QM’s cannot have risky features, like negative amortization.

• And, a QM should be fairer, with limits on points and fees lenders can charge. A loan over $100,000 cannot be a QM if it has points and fees that are more than 3 percent of the loan amount.

Welcome to the new era of lending!

Information Lenders will Seek and Verify from Borrowers

Under the Ability-to-Repay rules that went into effect Jan. 10, here’s the financial information applicants must provide lenders when seeking a home loan. The lender generally must consider eight types of information:

1. Current income or assets.

2. Current employment status.

3. The applicant’s credit history.

4. Monthly payment for the mortgage.

5. Monthly payments for other mortgage loans approved at the same time.

6. Monthly payments for other mortgage-related expenses, such as property taxes.

7. Other debts.

8. Monthly debt payments, including the mortgage, compared to monthly income — “debt-to-income ratio” — or how much money the borrower will have left over each month after paying debts, called “residual income.”

Lenders are now required to determine that borrowers can repay the loan. Toward that end, the lender may look at an applicant’s current income and assets — except the value of the mortgage property itself. The lender must also look at a borrower’s debt-to-income ratio or the amount of money the borrower will have left over each month to pay for essentials … such as, food and heat.

A lender cannot use temporary low payment rates to determine whether a borrower is able to repay the mortgage. For example, if the loan is an adjustable-rate mortgage, the lender will generally have to consider the highest interest rate that the borrower may have to pay. The new rules do, however, include exceptions for refinancing a consumer out of a risky loan. In defined circumstances, the ability-to-repay rule may not apply to a creditor refinancing a borrower from a riskier mortgage to a more stable mortgage. An example of a risky loan could be an interest-only loan. An example of a more stable mortgage could be a fixed-rate mortgage.

Goodbye to Risky Loan Features

Under the new rules that went into effect Jan. 10, qualified mortgages CANNOT have the following loan features:

• An “interest-only” period, when a consumer pays only the interest without paying down the principal.

• “Negative amortization,” when the loan principal increases over time, even though the borrower is making payments.

• Loans that are longer than 30 years.

• “Balloon payments,” which are larger-than-usual payments at the end of the loan term. However, loans with ballon payments are allowed by small creditors in certain circumstances.

• No-documentation and low-documentation loans banned. Plus, no more “Alt A” and “subprime” loans to borrowers with bad credit.

• Improved protections against steering. Anyone who is paid to offer, arrange or assist in finding a loan cannot be paid more to steer the borrower into a higher-cost mortgage.

With some temporary limitations, a qualified mortgage will generally impose a cap on how much of a borrower’s monthly income can go towards debt — set at no more than 43 percent of the borrower’s monthly pre-tax income.

And, qualified mortgages have limits on the amount of upfront points and fees that the consumer can be charged.

Many third-party charges, such as the cost of a credit report, are not included in the limit. Qualified mortgages also have limits on discount points, which a consumer pays in return for a reduced interest rate.

Nancy Starczyk is President of the Santa Clarita Valley Division of the Southland Regional Association of Realtors.

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