The recently set up Consumer Financial Protection Bureau (CFPB) has just issued a new rule which spells out the steps home mortgage lenders must follow to offer a mortgage if they want that mortgage to be a “qualified mortgage.”
What is a “qualified mortgage?” A “qualified mortgage” assures the lender that, if a borrower defaults on the loan, there will be little, if any, recourse for the borrower in a future foreclosure on the home to claim that the lender sold them a mortgage the lender should have known they couldn’t afford. In effect a qualified mortgage protects the lender from future borrower lawsuits. But, more importantly, the rule is intended to assure that borrowers can actually afford the home mortgages they sign up for.
Previously, there have been no rules preventing home mortgage providers from talking unsophisticated borrowers, frequently first-time home buyers, into mortgages which sounded “too good to be true” and, in fact, really were “too good to be true.” For example, mortgasges offering "interest-only" payments for the first few years let home buyers think they could afford a certain priced home only to find out a few years later that when the "interest-plus-principal" payments kicked in, they could not afford the mortgage payments. So, they lost the home to foreclosure along with whatever down payment they had invested and their good credit rating.
Other so-called "risky" mortgages included negative amortization. Negative amortization means the borrower’s monthly payment not only is not paying down the balance over time, but, in fact, is allowing the balance due to increase because the monthly payment isn’t even large enough to cover the interst due for that month. This is short of like being in a hole and trying to get out by keeping on digging.
A third type of "risky" mortgage kept payments seemingly affordable by being set up for very long terms like 40 or 50 years instead to the traditional 15 or 30-years. It seemed like an attractive way to make a home affordable but, in fact, the borrower was paying nothing, or almost nothing, each month on the principal amount so that after even 15 or 20 years, the borrower would still owe almost as much as when they bought the home. In effect, instead of the American dream of slowly building up "equity in your home," by making mortgage payments, the borrowers were accumulating little or no equity in the home. They just help make mortgage brokers, who got a commission for talking them into this bad loan, rich. The buyers were accumulating no, or at best, a negligible equity in the home.
The new CFPB rule, scheduled to become effective next year, defines that to be a “qualified mortgage,” the mortgage terms cannot include “risky” features like
- terms over 30 years
- interest-only payments
- negative amortization
- fees and points in excess of 3% of the mortgage amount, or
- result in the borrower spending over 43% of their monthly income on their total debt
Some real estate professionals believe this new rule is still too lenient providing too much protection to lenders from lawsuits but too little protection to unsophisticated borrowers. Low income borrowers, these professionals believe, should not be allowed to get a home mortgage that will increase their total debt payments to as high as 43% of thier income. If these people get such a mortgage, they are very likely to default on it eventually and then have no legal recourse against the shady mortgage brokers who profited by talking them into it.
Conversely, at least now there will be clear rules under which lenders know when they are going out on a limb risking potential future lawsuits when making a loan.
It is not clear that this new rule will loosen credit immediately. Cheryl Stimac, a Tampa Bay real estate professional believes credit needs to be relaxed somewhat to speed up the real estate market recovery. And, it is expected that with this clarification in place, mortgage providers will begin to loosen credit at least somewhat. While many builders and real estate professionals wish for some easing of currrent credit restrictions, no one believes that credit should ever be allowed to get as loose as it was before the “housing bust” of 2008 – 2009. No one wants a reoccurrence of that economic disaster.
If you have qustions about how to qualify for a home mortgage, E-Mail Me or call me directly at 813.163.6806. I'd be happy to answer your questions.
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