Yesterday, the Consumer Financial Protection Bureau released its new mortgage rules, intended to limit the subprime lending that caused the housing and finance bubbles to burst in 2007. Subprime lending, or non-conforming loans, has been around for a long time, but grew dramatically during the ten years leading to the crash, as banks developed products to serve homebuyers who did not meet Fannie Mae or Freddie Mac underwriting guidelines for prime mortgages. The most common type of subprime loan was an adjustable rate mortgage, the interest rate for which could often be changed at the discretion of the lender without regard to any underlying index, usually after some low-rate, initial period intended to entice the buyer. Millions of borrowers committed to loans they later could not afford, and the result was the worst economic collapse in generations.
What followed was a powerful recoil in credit availability. Tight qualifying standards have limited recovery and growth as banks, non-governmental organizations, and government reeled to limit further damage.
The new rules define what are called “qualified mortgages,” in hope of protecting buyers and banks, and further unlocking mortgage financing. Among other things, they require a 43 percent total homebuyer debt-ratio, cap upfront fees at three percent, and do not allow loans to balloon. If lenders comply, they are rewarded with significant legal protection from homebuyer lawsuits (which is certain to appeal to an industry already fined billions of dollars for improper lending and loan review practices). Banks have until January 2014 to comply with the new rules.
The rules mean that many types of borrowers will no longer be able to qualify for mortgages. What is more, there is sure to be a lag as banks adopt the rules. These factors will combine to keep mortgage lending sluggish for months to come until a new equilibrium is reached. Still, banks will fall into line by the deadline next year. And, they can still offer non-traditional loans, which still make sense for some buyers, but will do so at their own risk.
Community Development Corporation of Utah helps to ensure success of all homebuyers. CDCU remains one of the premier, federally-approved housing counseling agencies in the nation. Homebuyers of all walks-of-life would do well to attend CDCU’s homebuyer education class and meet with a housing counselor to ensure they negotiate the pitfalls of mortgage financing and homeownership.