Buying a home to bring hurdles
Some shoppers planning to buy a home in 2014 will get more scrutiny — and likely less money.
Here's why: A new set of rules for getting a mortgage kicks in. Interest rates are expected to rise. And loan amounts are expected to shrink.
The Consumer Financial Protection Bureau's rules, which take effect on Jan. 10, establish a national standard for issuing mortgages and are meant to prevent the risky lending practices that led to the housing crash.
The bureau, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, says the rules mostly codify practices that are common in today's more careful mortgage climate.
Many mortgage experts and consumer advocates alike applaud the bureau's requirements. In addition to looking after consumers, the rules provide a safe harbor for lenders, shielding them from lawsuits.
“Lenders are going to be crossing their T's and dotting their I's like never before,” said Bob Walters, chief economist for Quicken Loans. But strict adherence to the rules could result in unintended consequences, he added. “There's going to be circumstances where people who should get mortgages won't get mortgages.”
Two other developments could make getting a home loan more difficult. Some economists predict interest rates will gradually work their way up to the mid 5 percent range by the end of 2014. And there's a good chance that limits on the size of some popular loans will be lowered next year.
Here's what's on the horizon and how it may affect you:
The consumer bureau's goal makes sense: restrict mortgages that borrowers can't afford. The standards are listed in the bureau's Ability-to-Repay and Qualified Mortgage Rule.
The Ability-to-Repay standard bans no-documentation loans and requires lenders to verify and document a borrower's income, assets, savings and debt.
The Qualified Mortgage grants the creditor greater protection from potential liability. Under this rule, lenders cannot include toxic features such as negative-amortization “option ARMs” that increase borrowers' debt with each monthly payment, or excessive upfront points and fees (these will be limited in most cases to 3 percent of the loan amount).
Qualified Mortgage loans will generally have to be made to borrowers who have debt-to-income ratios less than or equal to 43 percent, though a temporary exception allows Qualified Mortgage status for higher ratios if the loans are eligible for purchase by mortgage giants Fannie Mae, Freddie Mac, the Federal Housing Authority and some other government programs. Another exemption allows certain small lenders to issue Qualified Mortgages with ratios of more than 43 percent.
The rules help speed up the process of getting a mortgage by giving lenders the authority to reject outright credit-report information if a borrower can prove that it's wrong. “That's a huge deal,” said Jeff Lazerson of Mortgage Grader in Laguna Niguel, Calif. “It's monster-good.”
Richard Cordray, director of the bureau, recently told the Mortgage Bankers Association that most of the home loans granted now would be considered qualified mortgages.
Some in the mortgage industry, however, say that getting a loan could become harder for some borrowers, especially those in lower-paying jobs, retirees or entrepreneurs whose income fluctuates.
“If you're trying to stretch to get into a home, it is going to have an effect on you,” said Ryan Grant, sales manager at Imortgage in Newport Beach, Calif. From the lender's perspective, he added, “You will have to have some really good compensating factors to go outside of that (Qualified Mortgage rule).”
The people most impacted won't be the wealthy, Walters said. “It's going to be the people who traditionally are the first-time homebuyers, the ones who have the most challenge getting a loan.”
Lenders don't have to adhere to the Qualified Mortgage rule. But if they don't, they don't get legal protection if the buyer defaults for a reason that should have been foreseeable.
“If the loan is originated as a (Qualified Mortgage) loan and then is later found to not be, the lender can be exposed to a possible lawsuit or repurchase of the loan, both of which are very costly,” said Joe Soto, vice president of mortgage lending for Guaranteed Rate in Los Alamitos, Calif. “What we have done and what most lenders will likely do is try to keep everything the same, to make sure there is no second-guessing.
“At the end of the day, if there is more risk for the lender, then there will be more pressure on the borrower to prove the ability to repay,” he said.
Lenders, however, also will have some good reasons to grant mortgages outside of the Qualified Mortgage rule.
Let's say a client has plenty of money in the bank and a sterling credit score. But the buyer is at a 55 percent debt-to-income ratio because he is self-employed with an irregular paycheck, or she is a savvy investor with a shifting income.
If you're that client, Walters said, “I'm happy to make that loan to you. You're never going to come back and sue me.”
But, he said, “I will not likely make a loan that doesn't adhere to the (Qualified Mortgage rule) for people who have a modest down payment, have not a lot of assets, have a higher debt-to-income or maybe a middling-to-poor credit score.”
At least in the beginning, Lazerson said, lenders are likely to be overly cautious. “They're going to err on the side of denying loans,” he said.
While mortgages may be harder to get for some, they're expected to cost more for everyone.
The National Association of Realtors predicts the 30-year fixed mortgage rate — at an average of 4.22 percent last week — will reach about 5.3 percent by the end of 2014. The Mortgage Bankers Association has said rates likely will increase to more than 5 percent in 2014 and then rise to 5.5 percent by the end of 2015.
What happens with interest rates, and how soon, hinges on the Federal Reserve's bond-buying program. The Fed, which buys $85 billion of mortgage-backed securities and Treasuries each month, is expected to increase rates after paring down the monetary stimulus.
But Janet Yellen, nominated to be the next chairman of the Federal Reserve, recently said that the employment picture and the economy must improve before the Fed cuts back on the program.
Earlier this month, a Bloomberg News survey of 32 economists indicated that the Fed may begin to slow its bond-buying purchases in March.
Lazerson, however, thinks interest rates will stay the same, or could even go down.
“The economy in general is tepid, at best,” he said. “Wages are stagnant, and that's a key driver. Things have really slowed down. If there's no demand for money, what's the point of raising the rates?”
The Federal Housing Finance Agency has signaled it likely will lower conforming loan limits in the summer of 2014, according to various reports. This, too, could shut off many homebuyers from getting conventional loans. The housing industry is urging the agency not to pull the trigger.
Conforming loans are those purchased by Fannie Mae and Freddie Mac. The two federally chartered mortgage finance companies buy the mortgages from lenders and keep them or bundle them into securities that they offer to investors with a guarantee.
Fannie and Freddie cannot back loans of more than $417,000 in most markets, though the limit ranges as high as $625,500 in some pricier areas.
If the limits are lowered, “Fewer will qualify for the home they would be able to qualify for today,” said John Stehle, vice president of mortgage lending for Guaranteed Rate's Costa Mesa, Calif., branch.
“Borrowers that no longer qualify for conforming will have to move to high-balance (loans), and borrowers that no longer qualify for high-balance will now have to go jumbo,” he said. “The rates will be higher, and the qualifying tougher, with each higher-limit tier.”
Many politicians and real estate industry leaders have objected to lowering the limits, a move many worry could impede the housing market, though lowering the limits would fit with the Obama administration's goal to wind down Fannie Mae and Freddie Mac. During the economic meltdown, the two enterprises ran into big trouble and were placed under government conservatorship. They have since become profitable.
Gary Thomas, a Villa Park, Calif., broker and former president of the National Association of Realtors, has written a letter to Edward DeMarco, the Federal Housing Finance Agency's acting director, challenging his authority to lower the limits. Thomas said in the letter that lowering them would have a significant, negative impact in high-cost housing markets around the country.
“We believe it is only fair to adjust the limits to reflect the higher costs of markets such as many of those in California and in the urban corridor from Washington to Boston,” Thomas said. “Without higher limits in these areas, many hard-working, middle-income families will be denied homeownership.”
DeMarco said a decision on whether to lower the limits, and by how much, will be made late this month.
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