New Mortgage Rules announced by CFPB – Is it good for consumers?

Consumer Financial Protection Bureau(CFPB) which was created by Obama Administration was given an important task. That task was to find out holes in the mortgage industry and propose a solution that will help both consumers and lenders and also should avoid another Sub-prime crisis. On Jan 10, 2013, they came out with new set of rules for the lenders which will go effective from Jan 21, 2013 and lenders have 12 months to implement the changes. Let’s see what’s the rules are all about and find whether these changes really helps consumers or make them harder to achieve the American Dream.

Below are some comments about the proposed rules:

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said Richard Cordray, director of the Consumer Financial Protection Bureau. The rules are meant to avoid the kind of mortgage mess that spawned the financial crisis and ultimately led to the Great Recession.

“It’s a set of standards that protects consumers from bad loans but it also protects lenders from lawsuits,” said Davis Stevens, CEO of the Mortgage Bankers Association. “Lenders are not protected if they go outside the guidelines.”
The new rules will eventually change the process homebuyers go through in obtaining mortgages.

“The rules will encompass most of the market as it exists today,” said William Emerson, president of QuickenLoans.

During the housing bubble(2006-2007), many lenders had lax underwriting standards. Banks often didn’t check documentation, didn’t require minimum credit scores and didn’t determine whether borrowers had income enough to keep up payments. Now, when a loan meets new lending criteria outlined by the CFPB, it becomes a “qualified mortgage,” which will give protection for the banks from lawsuits filed by aggrieved borrowers or buyers of mortgage-backed bonds.

How is a “qualified mortgage” defined?
The rules spell out what is called a qualified mortgage. To judge whether a loan is qualified, lenders must consider these factors:

  • Income and assets must be sufficient to repay the loan;
  • Borrowers must document their jobs;
  • Credit scores must meet minimum standards;
  • Monthly payments must be affordable;
  • Borrowers must be able to afford other debts associated with the property such as home equity loans;
  • Borrowers must be able to afford all home-related expenses such as property taxes; and
  • Lenders must consider a borrower’s other obligations like student loans, car loans and credit cards.

If an homebuyer is not able to satisfy the above rules, they could still get a mortgage, but only if the mortgage payments don’t exceed 43% of the borrower’s pre-tax income. There are few exceptions to this rule as well. For example, if you are under the water due to Subprime crisis and trying to refinance your home, you don’t have to satisfy these rules.

Which lenders do the rules cover?
All companies that give out mortgages will be governed by the new rules — big national banks, savings and loans, community banks and credit unions.

We already have similar set of rules in place and many lenders are following them already. I feel that its just the reinstated of those old rules with few new ones to make a loan as “Qualified mortgage” to separate out from the bad ones for the benefit of consumer and lender. That’s a good change. But many borrowers knowingly try to buy homes even though they know they cannot afford it. That can only be stopped by lenders strictly following these rules and denying mortgage for them. In order to do that, lender’s had to follow these rules for everyone and many legitimate borrowers end up affecting and asked for more paper and sometimes not able to get credit. If that happens, this might add fuel to the fire.

We can only hope that people start realizing that you cannot buy a home if you cannot pay for it and change their mind set to save for it first. That change will help create good stabilized mortgage industry and good real estate market. But it might take sometime for that to happen. Until that time, we have to wait and watch how these rules are implemented by lenders and how it’s really affecting the consumers and see whether its really making the change many expected.


About Vijaianand Thirnageswaram

I am a Proud Realtor of Texas, trying to guide and help clients to find their dream home and educate them to buy them for right price. I am also a Candidate for CFP who has more financial knowledge which allows me share and educate clients in any financial decision making process.

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