New Mortgage Regulations Will Limit Consumer Choices
New regulations were implemented on January 10, 2014 that limit consumer choices on what type of loan works for them or, in some cases, hurts consumers’ access to credit altogether. The rules are a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In short, the Consumer Financial Protection Bureau will determine, on a one-size-fits-all scale, what is considered a “Qualified Mortgage.”
It will be very difficult for lenders to make any loan that is not considered to be a Qualified Mortgage. This further limitation of credit will impede lenders’ ability to meet consumer needs. I will discuss just a couple of the new rules and their impact on consumers in this article.
One example of a new Qualified Mortgage rule is that the allowable debt-to-income ratio for borrowers is no more than 43%. This means that a borrower who grosses $1,000 a month (to name a number) would be able to spend no more than $430 on housing, car loans, student loans, credit cards, etc. Prior to the recent changes, consumers could spend as much as 45%-48% of their income on debt.
While I do believe it is generally a good thing that borrowers do not spend more than 43% of their gross monthly income on debts, there are exceptions. For example, a physician is in his final year(s) of residency and earning a modest income as compared to their seasoned peers. This physician is starting a family and would like to purchase a home that may limit his discretionary income in the short term. The physician wants to provide for the needs of his growing family today, knowing that greater income is expected in the near future, when discretionary income will markedly increase and debt-to-income ratio levels will drop.
Another scenario could be a relatively new insurance agent who has a great work ethic and works for a reputable and competitive firm. 10 months in to the new job the agent decides to purchase a home, but can only use base salary as qualifying income based on Fannie Mae/Freddie Mac guidelines since there is not a long enough record of commission income. The borrowing debt-to-income ratio may not reflect what the borrower is making and/or expects to earn in the coming months and years. This is a case where the lender should have the ability to consider honoring the client’s request to purchase a home, given there is a small track record of commissioned earnings as well as an expectation of continuance.
Another unintended consequence of the Qualified Mortgage rules will severely limit consumer’s choices when it comes to addressing mortgage insurance (PMI). In the past, lenders were able to offer to pay a one-time mortgage insurance premium on behalf of borrowers so that the borrowers would not have to pay monthly PMI. Of course, lenders would need to raise the rate to .125% or .250% above the market rate (depending on loan-to-value-ratio) to generate enough additional fee income to pay the fee on behalf of the borrower.
An example of the abovementioned PMI option is as follows: Borrower could either pay $100/month (to name a number) in PMI or $15/more per month in interest by selecting a slightly higher rate while allowing the lender to pay the one-time PMI premium on their behalf. Many borrowers opted for the slightly higher rate with no mortgage insurance, as this resulted in a lower payment for them. This option has largely been taken away by the new regulations.
Taken at face value, it is easy to agree with many of the new regulations. No decent lender wants people to borrow beyond their means or get themselves into a loan that they will have difficulty paying. However, Dodd-Frank is further restricting the ability of lenders to consider borrowers’ circumstances on a case-by-case basis. As you read above, the new rules are going to limit some borrowers’ access to credit and/or options when they do borrow.
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About the Author
David Coldiron serves as V.P. of Lending for Finworth Mortgage, an INSBANK Company. He has over 10 years of lending experience.