Utah Home Buyer Game Changer
New mortgage rules could affect your Salt Lake home purchase.
by Joel Carson
Utah Real Estate P.C.
New rules outlined by the Consumer Financial Protection Bureau (CFPB) today are designed to protect mortgage borrowers by reducing risky loans. The rules are also designed to make it easier for borrowers to understand loan terms – and to protect institutions that make those loans. If you’re in the market for a Salt Lake home for sale, listen up!
The bottom line? The CFPB is sending a clear message that sounds something like this: “Don’t lend money to people who can’t afford to pay it back.”
Of course, there’s a lot more to the bureaucratic move, but it’s all an effort to avoid the willy-nilly lending blamed in a big way for the country’s recent recession.
A CNN Money online report, “Consumer Groups Criticize New Mortgage Rules,” by Les Christie was released just hours after the CFPB announcement today shining a light on less-than-favorable reviews from consumer advocates claiming, “rules offer more protection for lenders than benefits for borrowers.”
What Brought These Rules About?
In 2006, the U.S. housing market was blazing. Prices peaked and lenders were all too glad to help people buy their own pieces of the American Dream. By the end of 2006, prices decreased slightly. The decrease continued through 2008. On Dec. 30, 2008, the market crashed and made a sound so loud it was heard (and felt) throughout the world. The Case-Shiller home price index dropped to the floor. Why? Many homeowners simply could not meet their debt obligations. The Salt Lake home market was not exempt.
Foreclosure rates skyrocketed in 2006 and 2007. This resulted in a crisis for the subprime, collateralized debt obligation, mortgage, credit hedge fund and foreign bank markets by August 2008. The domino effect was set in motion and down tumbled home valuations impacting mortgage markets. They weren’t the only ones impacted. The fall hit:
- home builders
- real estate professionals
- home supply retail outlets
- Wall Street hedge funds held by large institutions
- Foreign banks
Lesson learned. Many lenders were practicing – well – slopping underwriting. Loans moved forward often without documentation. Minimum credit scores were not enforced and sometimes debt-to-income ratios were fudged a little. Borrowers allowed themselves to sink deeper and deeper in debt. Lenders were all too glad to help.
Enter New Mortgage Rules
The CFPB has established mortgage rules that give protection for banks from lawsuits filed by borrowers or buyers of mortgage-backed bonds. In order to be considered a “qualified mortgage,” a loan must meet certain criteria outlined in the new rules. The intent is to protect consumers from bad loans, but also to protect lenders. If either party goes outside the criteria outlined, all bets are off.
Lenders impacted by the new rules include:
- big national banks
- savings and loans
- community banks
- credit unions
- all companies that make mortgage loans
A “qualified mortgage” means:
- income and assets are sufficient to repay the loan
- borrowers have documented their jobs
- credit scores meet minimum standards
- monthly payments are affordable
- borrower can afford other debts associated with the property
- borrowers can afford all home-related expenses
- lenders have considered the borrower’s other obligations like student loans, car loans and credit cards
- lenders can’t use payments based on interest-only loans or so-called negative-amortization rates, in which mortgage balances grow over time
A homebuyer can still get a mortgage loan if payments don’t exceed 43 percent of the borrower’s pre-tax income. Unfortunately, for some that kind of payment might be very difficult to make. The borrower could end up losing his or her home and have no recourse against a lender who made a bad loan.
A couple more important points follow:
- Lenders can’t use teaser rates that increase after a set term
- Loan terms can’t be more than 30 years; and, up-front fees such as points paid to reduce interest rates can’t be excessive
Some rules start by Jan. 21; however, lenders have 12 months to get everything fully implemented.
Please remember, you can still get an unconventional loan. These rules force lenders to approve your loan and your ability to repay as if it were a conventional loan.
People with subprime adjustable-rate mortgages or other risky loans who are refinancing can do so without going through the full underwriting process required by the new rules.
There is talk of making non-profit lenders for low-income homebuyers exempt from the rules. Some refinance loans made through the Home Affordable Modification Program and some loans issued by small community lenders could also be exempt. I don’t think we’ll see the end of modifications until spring or possibly early summer.
If you’re shopping for a Salt Lake home, this is a good time to get your loan application filled out and settle into the Utah real estate that’s right for you. Feel free to browse through thousands of listings online. By all means, contact me if I can help. Call me at 801-673-3333.