The new rules regulating mortgages servicing recently released by the Consumer Financial Protection Bureau (CFPB) offer new protections for homeowners facing foreclosure, but could also make getting a mortgage even more challenging than it already is by increasing borrowing costs and restricting credit availability. Similarly, new regulations regarding a category of mortgage known as a “qualified mortgage” may have unintended consequences as well. The new rules will take effect on January 10, 2014.
There is no doubt that banks and others in the financial industry dropped the ball. Once a mortgage is written, it is bundled with others and sold as mortgage-backed-securities. When you bundle up a bunch of junk mortgage backed securities and sell them as highly rated ones, and then another bank issues a credit-default-swap on those junk securities, trouble follows. This led to the so-called “Great Recession” and further resulted in multi-billion dollar government bailouts of the banks and the banks paying out several multi-billion dollar settlements for cutting corners in their foreclosure proceedings and causing millions to lose their homes and personal wealth when property values dropped. This prompted the passage of the Wall Street Reform and Consumer Protection Act, otherwise known as Dodd-Frank Act. The formation of CFPB was part of that law.
According to CFPB’s summary of the new mortgage servicing rules, the rules can be divided into 9 topics: periodic billing statements; interest-rates adjustment notices for ARMS; prompt payment crediting and payoff statements, forced-placed insurance, error resolution and information requests, general servicing policies, procedures, and requirements; early intervention with delinquent borrowers; continuity of contact with delinquent borrowers; and loss mitigation procedures.
In short, the idea of the new mortgage servicing rules is to make avoiding foreclosure easier. For example, “dual tracking” is now restricted. Dual tracking is when a bank pursues foreclosing on a property while a homeowner simultaneously works to avoid said foreclosure by selling a home through a short sale or pursues a loan-modification. A bank also now needs to notify a homeowner of their alternatives and provide direct access to bank personnel, so no runarounds and no surprises.
“For many borrowers, dealing with mortgage servicers has meant unwelcome surprises and constantly getting the runaround. In too many cases it has led to unnecessary foreclosures,” said CFPB Director Richard Cordray in a press release. “Our rules ensure fair treatment for all borrowers and establish strong protections for those struggling to save their home.”
While the new rules are great for helping people keep their existing homes, it will also make getting a mortgage more expensive, but given historic low interest rates, it shouldn’t be that much more expensive. Those with vested monetary interests in deregulation tend to rely on scary rhetoric to promote deregulation.
“Anytime you create a better system, it means more costs, and consumers are going to bear that,” Jaret Sebierg, a senior policy analyst at Guggenheim Securities told The Washington Post. “It will get passed on to them in the form of higher interest rates and less credit availability.”
Mortgage Bankers Association president David H. Stevens told The Post that the costs will be raised because, “mortgage servicers will have to improve their operating systems, quality control measures, legal review and training.”
Additionally, it should be noted that, despite historically low interest rates, home sales aren’t increasing as fast as they could because of stricter bank requirements. So it was already harder to get mortgage without the new rules for mortgage servicing.
Others have contended that the new rules regarding how to determine a borrower’s ability to pay will prevent minorities in low-income neighborhoods from qualifying for qualified mortgage because of a provision that shields banks that issue such mortgages from legal action.
An article in the The Fiscal Times argued that CFPB’s new “affordability test” when underwriting a category of mortgage called a “qualified mortgage” requiring that a borrower’s debt-to-income ratio not exceed 43% will make it harder for minorities in low-income neighborhoods to get a loan. The authors argue that this is because banks will be more comfortable with issuing only qualified mortgages to limit their liability. However, this is conjecture. The notion of a qualified mortgage was brought into play because of the fact that many bad mortgages were bundled up into mortgage-backed-securities that went bust. The idea is that a “qualified mortgage” will prevent that from happening again.
“Though bankers are understandably eager to avoid further mortgage losses, and therefore unlikely to open the lending floodgates anytime soon to low-credit applicants, creating greater legal vulnerability for doing so is making this worse, not better,” The Fiscal Times article noted.
How the new qualified mortgage rules will affect the jumbo loan market was a question asked by The Wall Street Journal. This is because of the elimination of interest-only loans and the 43% debt-to-income ratio requirement for qualified mortgages. Citing Lending Processing Services statistics, The Journal reported that 17% of 2011 jumbo loans were interest only mortgages. The financial newspaper also stated that CFPB estimates that 15% of jumbo loans issued in 2012 didn’t meet the 43% debt-to-income provision. So that percentage of home buyers needing a jumbo loan may not buy because they don’t qualify for a qualified mortgage. Of course, it could also mean that they will simply buy a more affordable home or finance their property differently. After all, as the Wall Street Journal piece states, the financially savvy buyers in this market sometimes seek interest only loans merely as a financial planning tool. The current jumbo loan limit is $417,000.
Although there are criticisms and fears of unintended consequences, the new rules created by CFPB could have a long-term benefit to the stability of the real estate market because it promotes more responsible lending practices. The previous practices of the banks led to millions of people losing their jobs and their homes and stunted lives. Property values dropped, leading many to lose most of their personal wealth. While many say it is the wrong time for tighter banking regulations, the same people will never say there is a right time. And the director of the International Monetary Fund Christine Lagarde agrees.
The big question right now is: What will the down payment requirement be for a qualified mortgage? CFPB has yet to make that determination, but a 20% down payment will undoubtedly price most home buyers out of the market. However, some are working to make the down payment requirement as little as 5% (see video below).
If you are planning on buying or selling a home in the Pioneer Valley, make your first call to Michael Seward at 413-531-7129.