As of Jan. 1, 2014, the new Consumer Financial Protection Bureau (CFPB) rules and requirements for buying a home and refinancing a mortgage, also known as the “qualified mortgage” or “ability-to-repay” rules, are in effect. There may be a few challenges ahead for buyers who may not be prepared for the heightened level of financial scrutiny. The good news is that by having a firm handle on the changes, brokers and their agents can stay ahead of the game, guiding their buyers as they navigate the new requirements.
The new rules, designed to discourage the predatory and risky lending that led up to the recent financial and housing crisis, stem from the Dodd-Frank Act (2010). Among other things, the sweeping legislation established an independent consumer bureau within the Federal Reserve to protect borrowers against abuses in mortgage and other types of lending. Predatory lending practices (in theory) are a thing of the past. The goal is that the new rigor in ensuring homebuyers can afford to repay their mortgages will stabilize the housing market for the long term.
What Brokers Need to Know
For brokers and agents, the new mortgage rules mean that buyers must jump through more hoops than in the past. As such, the new ability-to-repay guidelines require more documentation for both borrower and lender. And the new qualified mortgage (QM) guidelines, if adhered to, mean that both the lender and borrower are protected in the event of a loan default.
In a nutshell, for buyers, these guidelines mean:
• No more interest-only, negative amortization, balloon payment loans, or prepayment penalties, since these are risky products
• Upfront points and fees must not exceed 3 percent of the total loan amount
• Debt-to-income ratio may not exceed 43 percent
• For brokers and agents, this means helping buyers understand that to qualify for a QM, they may have to stick within a specific price range unless they can put down a bigger down payment or find a co-signer.
Goodbye Upper-End Homes?
According to Housing and Consumer Analyst Dani Babb, new housing requirements mean it may become more difficult for real estate professionals to sell higher-priced homes. Borrowers who need jumbo loans might find them harder to come by.
“Between 12-14 percent of higher-end homebuyers use interest-only loans to secure their profile, which means those buyers may be inched out of the market,” says Babb, a licensed real estate agent and CEO of The Babb Group, a real estate investment firm and consumer education company.
Things Get Tougher for the Self-employed
Entrepreneurs and small business owners, such as those operating as a sole proprietorship, a limited liability company or an S-corp, may also have a harder time getting loans. While they may have been able to secure even jumbo loans easily in the past, with the new requirements, many will find themselves disqualified for QMs due to the more rigorous and less flexible income verification requirements. (Among other requirements, you now have to show two years of W-2s as opposed to stated income.) Small-business owners and the self-employed often show lower total income on tax returns than their actual capacity to pay, which will work against them when it comes to QM loans.
It’s useful to help buyers understand that if they are planning on buying a home, they will want to talk to their accountant to make certain their tax planning doesn’t lower their taxable income unnecessarily.
Reconnecting with Mortgage Brokers
It’s not all doom and gloom, though. New lenders are emerging to fill the gap to provide loans, even though they aren’t QMs under the rules. There are portfolio loans available, particularly offered by smaller institutions like community banks and credit unions that will work with people with a high credit score to figure out ways to qualify.
Mortgage brokers are more important than ever, given their access to lenders, as well as credit unions and community banks. While the bad rap suffered during the subprime crisis caused many brokers and agents to distance themselves from mortgage brokers, Babb sees mortgage brokers as key players on the market once again since they are knowledgeable about credit unions and community banks that are willing to go outside the rules.
Daniel M. Rand, director of affiliate operations at Rand Realty, agrees. “2014 is the year of the return of the mortgage broker,” says Rand, noting that many smaller banks are filling the void with non-QM loans. “Access to product will be more and more important since there will be more variation outside of QM. Accessing it will rely heavily on the brokerage network.”