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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Sep 27, 2013

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The CFPB’s new mortgage rules are schedule to go into effect beginning at the end of 2013 and through into 2014. These rules will affect home loan lenders, borrowers, and the housing market as a whole.

The rules can be summarised as follows but additional information can be found on the CFPB’s rule guide.

 

  • Creditors will be required to make a reasonable, good faith determination of a consumer’s ability to repay home loans.
  • More types of home loans will be protected by the Home Ownership and Equity Protections Act (HOEPA). In addition, pre-loan counseling will be required.
  • Loan origination compensation will be regulated, as will be the process for becoming and remaining a loan originator. Depository institutions will also face stricter compliance procedures.
  • Lenders will be required to provide free copies of all appraisals and written valuations to applicants.
  • Higher risk mortgages must be appraised and high-interest home loans will be subjected to new standards.
  • Higher-priced home loans must be kept in escrow longer. Some home loans in rural or underserved areas will be exempt.
  • Home loan servicers will have to correct errors and provide certain requested information to borrowers. They will also have to provide protection to borrowers in connection to forced-placed insurance. Servicers will also have to establish reasonable policies and procedures for delinquent borrowers.

While the CFPB created these rules in response to the recent Housing Crisis, two housing industry insiders are filled with concern over how these rules can impact the economy, let alone borrowers and lenders.

More Rules, More Problems

Rick Sharga, Executive Vice President of Auction.com, said that none of these rules will be good for the housing market and that they were likely made simply to restrict lenders.

“The CFPB estimates that about 90 percent of the loans currently being issued would meet the new requirements,” he said. “But that means that 10 percent fewer borrowers will be eligible for loans in January 2014 when the new rules kick in.”

Since credit is unusually tight at the moment, Sharga expects most banks to focus their lending to qualified mortgages in order to avoid litigation and regulatory risk. Even more worrisome are rumors he’s heard that the FHFA will reduce the limits on home loans backed by Fannie Mae and Freddie Mac. As a result, home loans will be harder to come by for people in high-priced states such as California, New York, Florida, and Hawaii.

If such a gap in the market appears, all is not lost for prospective home loan borrowers.

“Eventually, non-bank lenders will enter the market with non-agency loans that don’t fit exactly within the QM rules and therefore don’t offer the same legal protection for the lenders to fill this void,” said Sharga. “But it’s likely that these loans will still be relatively hard to get, require significant down payments and have higher interest rates than qualified mortgage loans, making affordability a bit of an issue.”

Sharga noticed that rules concerning Qualified Mortgage and Ability-to-Repay were the most notable changes introduced by the CFPB.

This is because the Ability-to-Repay rules were designed to make sure that home loan lenders don’t lend to borrowers who are unable to repay. The CFPB will now require that home loan lenders view a borrower’s:

  • Current assets
  • Employment status
  • Monthly payment
  • Property taxes
  • Insurance
  • Other debts
  • Alimony
  • Child-support obligations
  • Debt-to-income ratio
  • Credit history

“Historically, most of these attributes were considered by lenders during the underwriting process, but during the real estate boom and the sub-prime lending explosion from 2000-2006, traditional underwriting standards were often overlooked,” said Sharga.

His analysis continued on into the CFPB’s qualified mortgage rules, which will now ban certain types of home loans and features.

For example, simply stating income will no longer be permissible. Applicants will have to have their income actually verified. Negative amortization and interest-only home loans are balloon payments are not allowed. All qualified mortgages will also be capped at 30 years and borrowers will not be able to sue home loan lenders for alleged predatory lending if the lenders prove that they issued financing under the guidelines of qualified mortgages.

Sharga is more worried that the CFPB’s interference in the housing market may actually stall the ongoing housing recovery.

“The CFPB’s mission isn’t to promote or stabilize home ownership,” he said. “It certainly doesn’t exist to protect home price appreciation.”

In Sharga’s estimation, the CFPB’s mandate to make loans both safe and available is difficult to fulfill.

While the new rules make home loans safer, they do so by making it harder for many consumers to qualify for them. As a result, he predicts home prices will soften in the early part of 2014 as demand dips.

Fortunately, the rules will end up protecting prospective homebuyers who are not financially ready to purchase homes. The downside though being that responsible borrowers with less-than-perfect records will have a difficult time purchasing homes, which will slow the housing recovery and broader economy.

“To be fair, the CFPB also isn’t putting policies in place that are intended to scuttle the housing market recovery,” said Sharga. “If anything, it’s trying to prevent the kind of behavior that led to the volatile ‘boom and bust’ cycle that we’re still recovering from.”

Robin Hood in the Rules

Robert Spinosa, a Loan Agent for RPM Mortgage, said that the CFPB’s new rules are a net negative for most everybody in America and that it was a classic case of a complex problem being given a simple, but wrong, solution.

As far as Spinosa is concerned, the only people benefiting from the rules are the buyers who would purchase homes without properly educating themselves or understanding their loan documents.

One of his biggest problems with the looming rules is the anti-steering measure.

Anti-steering refers to ensuring that the borrower is made aware of all other available rates and programs at the time of locking in their chosen home loan rate. This allows the borrower to compare all of the interest rates and programs available to the offer that they are choosing to go with. In effect, “all the cards” are laid on the table. The goal of this is to ensure that the loan officer has not deliberately “steered” the borrower into getting a home loan that is in favor of the lender.

Spinosa predicts that the anti-steering measure in the rules will result in fewer buyers competing for home loans, thus hurting the recovery. This is because anti-steering measures tend to result in buyers having less access to credit. Since housing booms and recoveries rely on buyers being able to obtain home loans, naturally it is more difficult to see an increase in home purchases.

Another problem posed by the rules is that the requirements for a qualified mortgage applicant’s debt-to-income ratio is set at 43 percent.

“This number was derived arbitrarily and not from real data that shows this is a dramatic risk point for default,” said Spinosa. “So again, all borrowers bear the brunt.”

In an arguable sign of government mismanagement, Spinosa alleges that the CFPB will use its vast resources to audit home loan lenders instead of supporting a healthy workforce of loan officers who will now be forced to conduct business under the rules’ strict constraints.

“In the end, Dodd-Frank, when it comes to mortgage lending, is Robin Hood,” he said. “It takes from those who can to, wishfully, attempt to provide an environment for those who can’t.”