Will new mortgage rules set stage for subprime resurgance

Subprime Mortgage

After much speculation, new mortgage and appraisal rules have recently been revealed and will go into effect in January.  Combined with the recent news of FHA’s reduction of loan limits (authorized increased limits sunset the end of 2013), there’s been a lot of buzz about how the housing market and home buyers could be affected.

On December 18th, the Consumer Financial Protection Bureau (CFPB) launched a campaign to educate consumers about new mortgage rules that go into effect January 10th; specific information and fact sheets can be found at consumerfinance.gov.  Among the new rules, several include: the creation of the Qualified Mortgage (QM); new mortgage servicing rules; and additional protections financially challenged borrowers.

The QM is classified by the CFPB as a loan which qualified borrowers are presumed to be able to repay; and is described as a “safer” loan compared to some of loans originated prior to the mortgage crisis.  One of the main features of a QM, as of January 10th, is that mortgage lenders will have to assess the borrower’s ability to repay.  Additionally, the borrower cannot exceed a total monthly debt-to-income ratio (all monthly obligations including mortgage payments) of 43%.  Although lenders must make an effort to determine a consumer’s ability to repay based on typical factors including: income, assets, and debts; the new rules do not eliminate all subprime mortgages.

Two additional features of a QM include safer terms and limiting points and fees.  A QM cannot have loan terms that have been attributed to “risky” loans, such as negative amortization or interest only payments.  Furthermore, if you are directly paying a mortgage broker to originate your loan, they can no longer receive additional payment by another party for the same transaction; a QM is limited to 3% of the loan amount for points and fees.

To assist borrowers, the CFPB has set new mortgage servicing rules that include: providing clear mortgage statements that show how payments are credited; addressing mistakes promptly; crediting payments when received; and providing early notice for adjustable interest rate increase.

To assist borrowers facing financial challenges, the CFPB institutes rules that include: foreclosure cannot be initiated prior to 120 days delinquent; a foreclosure cannot be initiated if a complete application for mortgage assistance has been submitted; servicer call centers must be able to answer borrower questions relating to critical documents; as well as providing accurate and timely foreclosure status to borrowers who ask.

Financially challenged borrowers seeking assistance through their mortgage servicer have additional protections.  Borrowers who make application for loss mitigation early on must have all their options evaluated with one application; an explanation must be provided to borrowers rejected for loss mitigation; and borrowers could appeal a loan modification rejection based on the servicer’s mistakes.

New appraisal rules instituted by the CFPB become effective January 18th.  Although these rules do not apply to all mortgages, typically a borrower should expect: a licensed appraiser; an interior of the property, and a copy of the appraisal prior to closing.  Additionally, a second appraisal is required for a home that is considered a “flip;” a home sale that has sold in the previous six months is classified as a flip.

Although some have speculated the new rules, along with reduced FHA loan limits, will limit the availability of mortgages for some home buyers; others see the resurgence of the subprime mortgage to fill the gap.

New mortgage rules, lowered FHA loan limits, and other new changes are increasing investor backing of non-conforming mortgages.

by Dan Krell
© 2013

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Disclaimer.  This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice.  Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction.  Using this article without permission is a violation of copyright laws.

A novel idea: Consumer friendly mortgage disclosure

Even before its official first day of operation (July 21st), the Consumer Financial Protection Bureau (CFPB: consumerfinance.gov) has been hard at work. The newly formed bureau (created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010) has been working toward their stated mission “…to make markets for consumer financial products and services work for Americans…”

What better way for the CFPB to begin its operations than to make an easy to understand mortgage disclosure? Back in May, the CFPB announced its creation of the “Know Before Your Owe” project, which has sought to consolidate mortgage disclosures as well as decrease the confusion of mortgage shopping. The “Know Before Your Owe” project will merge two lender disclosures: one required by the Real Estate Settlement Procedures Act (RESPA) and the second required by the Truth in Lending Act (TILA).

Devised as a protection for consumers from abusive and predatory lending practices, RESPA was enacted in 1974 as a “…consumer protection statute designed to help homebuyers be better shoppers in the home buying process…” As of July 21st, the CFPB has taken over administration and enforcement of RESPA, which was previously administered by the Department of Housing and Urban Development (HUD).

First enacted in 1968, TILA provides a framework for which lenders must inform consumers about the cost of their loan. TILA requires such disclosures as the Annual Percentage Rate (APR), finance charge, amount financed, and the total amount paid as scheduled. TILA is enforced by various government agencies, which now includes the CFPB.

RESPA and TILA require several disclosures to be provided to you within three days upon making your mortgage application, as well as not having changed prior to your closing of the transaction. Changes to these regulations and disclosures have often been made to keep up with the industry as well as to enhance consumer disclosure and education; the most recent round was after the financial crisis in 2008. Designed to be more efficient and accurate in providing information to consumers, the most recent changes to the Good Faith Estimate (GFE), along with the Truth in Lending Disclosure Statement, continue to be confusing for many people.

Many consumers were easily confused by past versions of the GFE and the Truth in Lending Disclosure Statement because it was difficult to compare mortgage costs between lenders; costs were not always labeled consistently. The new form seeks to standardize fee and cost disclosure such that making a comparison will be more like comparing two apples rather than an apple to an orange.

The combination of these two disclosures is not only an effort of the CFPB to increase transparency in the lending process, but it is also mandated by the “Dodd-Frank Act.” The “Know Before Your Owe” project began testing two versions of a new disclosure that would consolidate the combined five pages of overlapping information into one easy to follow form of two pages. The prototypes provide easy to follow information regarding the loan; and also include clear sections highlighting cautions, comparisons, lender fees and a loan summary.

Since testing began in May, the CPFB has been requesting feedback from consumers and professionals about the new disclosure. Although the finalized form is not expected to be in use until next year, you can view the prototypes as well as provide feedback on the CPFB website until September 19th.

by Dan Krell
© 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.