Earlier this month the Consumer Financial Protection Bureau (CFPB) announced several changes surrounding mortgage proceedings.
Mark Skinner, Mortgage Originations Manager at IBM Southeast Employees’ Federal Credit Union (Boca Raton, FL) details the new rules and how they will impact the industry. “For over a year the Consumer Financial Protection Board (CFPB) has been working on new rules that are designed to protect consumers and help prevent another real estate / financial crises like the one we experienced in 2007.”
He says that the new rules address three topics including ability to repay, escrow requirements, and high-cost loans and home ownership counseling. Certain areas of each rule will go into effect at different points over the next few years. “804 pages on ability to repay and 431 pages on high-cost and home ownership counseling rules go into effect January, 2014. However, on June 1 of this year the new 116 page rule for escrow requirements will go into effect.”
New Mortgage Ability to Repay Rule
Skinner believes the ability to repay rule will reshape the types of mortgage loans being offered in the near future. “The ability to repay rule lays out eight basic requirements to determine the borrower’s ability to repay the loan and defines a ‘qualified mortgage.’ A qualified mortgage provides lenders with a presumptive safe harbor regarding the borrower’s legal options if the borrower defaults on mortgage loan payments.” Underwriting requirements on mortgages made to Fannie Mae, Freddie Mac, Veterans Administration, and Federal Housing Administration are exempt from this rule for at least the next seven years.
He adds that the ability to repay rule also limits the borrower’s total debt payments to 43%, which for decades has traditionally been 45% for most lending institutions. “What this means for a family with a $60,000 annual income is their mortgage payment plus car, credit card, and other monthly obligations cannot exceed $2,150 a month. In determining the 43% debt to income ratio, the mortgage payment includes the principal and interest payment plus 1/12th of the yearly tax and insurance payment amount along with any home owners association payment as computed to a monthly amount if it is paid quarterly, semiannually or annually.”
Because interest only, balloon, negative amortization and loan terms greater than 30 years are not considered to be qualified mortgages, Skinner predicts that they will become scarce or even extinct. “Additionally, I envision that additional disclosures and or acknowledgments will be required at loan closing to attest a borrower loan as a qualified mortgage. The lender will also be required to maintain the evidence of the borrower’s ability to pay for three years.”
New Mortgage Escrow Rule
“On the escrow rule, borrowers of nonqualified mortgages will be required to escrow taxes and insurance payments for five years instead of 12 months, which is the current requirement,” Skinner says. “The instance of a nonqualified mortgage that occurs most frequently are borrowers that obtain fixed rate equity loans. Equity loans typically have higher interest rates than standard first mortgages but many lenders pay the closing cost associated with an equity loan, which can make that loan more attractive.”
Additionally, equity loans enable consumers to borrow money when they don’t meet the credit requirements of a standard first mortgage. In some cases, an equity loan’s annual percentage rate will require the borrower to escrow their tax and insurance payments even if they are not escrowing on their first mortgage.
High-Cost Mortgage Rule
The high-cost mortgage topic addresses loans of $50,000 or less that have annual percentage rates (APR) that exceed comparable average prime offer rate (APOR) by more than 6.5% for first lien mortgages and 8.5% for second lien mortgages.
“For the average consumer, APR and APOR are not terms they are familiar with so to better understand this, here is an example,” Skinner outlines. “On January 14th the APOR for a 30 year mortgage was 3.46%. Therefore, a first mortgage lien loan with a rate that exceeds 9.96% APR would be considered a high-cost mortgage and require escrows for five years. The loan would also require additional disclosures to be in compliance with the Truth-In-Lending Act.”
“One might think that an APR of 9.96% is high but if you consider how mortgage APR is calculated you could easily have a $30,000 loan with and interest rate of 6% for five years exceed 10% APR,” Skinner says.
Additionally, those obtaining a high-cost mortgage must seek homeownership counseling. “For all mortgage applications, lenders are required to provide a list of homeownership counselors within three days of application,” Skinner explains.
How Do New Rules Impact the Borrower?
For some credit unions and consumers the first thought regarding the new regulations is, “what is this going to cost?”
“The new rules should not have an impact on the rates or fees SCCU offers our members,” says Thomas R. Baldwin, Executive Vice President/Chief Financial Officer for Space Coast Credit Union (Melbourne, FL). “Space Coast Credit Union did not participate in the ‘higher-price mortgage loan’ products addressed in earlier rules.”
Skinner believes that future costs remain to be seen. “The long term impact of these rules is hard to measure as the majority of the rules will not take effect until next year. The credit union has similar documentation requirements as outlined in the new rules but some new responsibilities may add some costs.”
“The big driver of rates is the secondary market and as long as the Fed continues to purchase mortgage-backed securities, rates should stay relatively stable,” Skinner continues. “Long-term, its hard to say if the new rules will help build confidence in the private market to purchase mortgage backed securities thus enabling market factors to drive mortgage rates.”
“Will fees go up because of additional reporting and record keeping? Probably not much,” he adds. “My advice to anyone looking at buying or refinancing their home is to act this year while rates and house prices are still low regardless of the new regulations.”
Baldwin says that borrowers have already seen increased documentation requirements as a result of underwriting and documentation requirement changes at Fannie Mae, Freddie Mac, and government agencies, as well as Truth-in-Lending rule changes for the past several years. “Space Coast Credit Union (SCCU) already runs all of our mortgage applications through Fannie Mae or Freddie Mac underwriting models prior to giving it to our underwriting employees, so we will not see much change in our procedures, nor do we anticipate becoming significantly more conservative in our lending practices.”
As long as lenders follow Fannie Mae or Freddie Mac guidelines or government agency guidelines, such as FHA and VA (as SCCU currently does), they are protected for the foreseeable future under this rule, Baldwin adds. “As has been the case for years now, borrowers just need to have their documentation in order and not have monthly, recurring debt obligations that exceed a reasonable percentage of their income, so they can prove their ability to repay the mortgage loan for which they are applying.”
Still unsure how the new mortgage rules will impact you? Find a credit union and contact a mortgage professional for more information.