New Rules Will Make Mortgages Safer
The residential foreclosure crisis has claimed nearly 4 million U.S. homes since 2008. At the start of 2013, it looks like the worst is over. The number of homes in the foreclosure process has reached its lowest level since the crisis began.
Dodd-Frank Overhauls Mortgage Laws
During the housing bubble, many mortgage lenders operated with extremely lax underwriting standards. Often, banks failed to check documentation, to require minimum credit scores and to determine whether borrowers had enough income to make their payments.
The Dodd-Frank financial regulatory overhaul of 2010 amended existing lending laws by making banks and other mortgage lenders legally responsible for determining that a borrower has the ability to repay a mortgage. The Consumer Financial Protection Bureau is charged with spelling out how banks can satisfy the new mandate.
New Rules Protect Borrowers
The CFPB in January 2013 released new qualified mortgage rules, which are meant to reduce risky lending and make it easier for borrowers to understand what they are getting into. Mortgage lenders have until 2014 to implement the new rules.
New Rules Also Protect Lenders
When a loan meets the new lending criteria proposed by the CFPB, it becomes a “qualified mortgage.” Banks who issue only qualified mortgages are protected from lawsuits filed by unhappy borrowers or buyers of mortgage-backed bonds. Banks are not required to issue only qualified mortgages, but most will do so in order to protect themselves.
“Ability to Repay”
Under the Ability-to-Repay rule, all new mortgages must comply with basic requirements that protect consumers from taking on loans they won’t be able to pay back. Lenders must make a reasonable, good-faith determination that a borrower has enough income and assets to repay the loan that they are offering.
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. Lenders must consider a borrower’s other obligations like student loans, car loans and credit card debt.
In general, qualified mortgages will be made to borrowers who have a total debt-to-income ratio of less than or equal to 43 percent.
Plus, loans in which borrowers make only low “teaser” interest payments for a period of time and those in which the principal balance can increase over time are excluded by law from being qualified mortgages.
New Mortgage Servicing Rules
An additional set of rules issued by the CFPB in February 2013 addresses rules for entities that service home mortgages on behalf of the lenders.
These rules are designed to protect struggling borrowers by making changes to the foreclosure process and offering alternatives to foreclosure. They require servicers to avoid “surprises” by communicating clearly with borrowers about statements, interest-rate adjustments and all fees. They require that servicers avoid “runarounds” when handling any and all borrower requests and complaints.
Other new rules address appraisals, escrow accounts, protections for high-cost mortgages, and compensation and qualifications for loan originators.