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Taking a crack at new back-to-basics mortgage rules

January 17, 2014

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Spring real estate season is going to be here in the blink of an eye, and if you haven’t done so yet, you might also kick off residential real estate coverage for 2014 with a personal finance primer about the new Ability to Pay /Qualified Mortgage rules that will affect borrowers and lenders.  The new rules are a modification of the Truth in Lending Act, and are a result of the Dodd-Frank financial regulation overhaul.  They took effect on Jan. 10.

Here’s the explanatory site from the Consumer Financial Protection Bureau; there’s a good (PDF) consumer summary you can use in producing a primer, and you might also want to read the compliance guide for lenders.  The new rules require creditors to take into account factors like property taxes and insurance, alimony, child support, student loans and other obligations in assessing a borrower’s ability to repay.  There are exceptions for home equity lines of credit, reverse mortgage and other loans – and from a quick skim it also appears that loans made by non-profits and housing agencies are exempt.

Not everyone is upbeat about these ‘back to basics’ lending rules. U.S. News & World Report points out that the new rules may slow lending and an article by the National Association of Realtors warns that small lenders like credit unions may find it difficult to comply, both due to manpower issues and because borrowers can’t qualify under the new regulations.  You’ll want to get reaction and predictions from lenders in your area, and talk to other professionals whose business might be affected, like title companies.  How will real estate agents change their tactics – particularly buyers’ agents – in terms of pre-qualifying or vetting potential home shoppers? 

Meanwhile, with residential real estate prices up more than 13 percent in 2013, according to this New York Times piece, and gains even double that in some major metro areas, fewer homeowners are “underwater” in their loans. In other words, owing more than the house was worth on the market, touted as one of the biggest post-recession economic woes of the average household, is becoming less of a problem. 

As an aside, I think a lot of the reporting the past few years on this issue has been off base.  It was often implied in business stories that the mere fact of being “underwater” is immediately devastating to a household’s finances.  It really shouldn’t be if the loan was realistic in the first place; if one promised to pay, say $1,000 a month – either one can afford the $1K or not, regardless of the dwelling’s theoretical market value.  The ebb and flow of that value shouldn’t affect borrowers’ ability to pay; why would it? 

Photo by Flickr use Jamie Cox

Obviously, if the household needs to sell the property because it can no longer afford the payments due to job loss, opportunity to relocate, change in family circumstances, etc., and selling would mean a huge financial shortfall, that’s a problem.  We see what happens when people abandon loans and houses, and the ripple effect on businesses from furniture stores to remodelers to landscapers when a residential real estate market stagnates.  I just wish much of the reporting on this issue had been more precise about the nature of the problem.

Anyway, although the problem is on the wane, I still keep hearing radio ads lately touting the benefits of mortgage refinancing under the HARP program, which Bloomberg recently called the best housing program you’ve never heard of. 

As Bloomberg points out, some 3 million people already have been helped by HARP, which stands for Home Affordable Refinance Program; here’s a link to the federal government site with information about eligibility and rules. And the latest iteration of HARP also extends to people who are in ill-advised arrangements like interest-only loans.   If your market still is plagued by pockets of foreclosures, low property prices or sub-prime and predatory lending victims, you might want to run a feature on HARP, who can get in on it before the 2015 expiration date, and some success stories through loans extended by local lenders.


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