The New Mortgage Rules!

"The longer homeowners remain in a negative equity position without relief in the form of a principal reduction, the more likely that foreclosure will become the path of least resistance for them."

The new mortgage rules are designed to protect borrowers and lenders from the ills of the pass housing crash. When lenders apply the rules, they are protected from legal recourse by borrowers or investors should the loans go bad.

The rules, however, are not mandatory, and some lenders say they will make loans outside of them, especially in the jombo and adjustable-rate spaces as lng as the borrower want them.

Under the new Dodd Frank financial reform legislation, all lenders are required to ensure that their borrowers can repay their mortgages. Lenders can prove they've done that automatically by following new rules from the Consumer Financial Protection Bureau.
The rules allow for adjustable-rate loans, but they have to be underwritten to the highest possible adjusted payment.
Loans can have no high fees.
 
No interest-only features, and, perhaps the biggest hurdle, a debt-to-income ratio no greater than 43 percent.

If all those rules are followed, the loan is deemed a "qualified mortgage" (QM) and the lenders are protected from most legal action.

While most loans being made today already fall into the QM category, a growing number of borrowers faced with rising interest rates are taking out adjustable-rate loans, which currently have lower monthly payments, and could therefore face the tougher underwriting. Also, the size of the average mortgage applied for today is the largest in history, at nearly $270,000, according to the Mortgage Bankers Association.
That could cause more borrowers to fail on the debt-to-income requirement.

Today the buyers that are out there are much more educated,and affluent. They have much larger home savings and home equity saved up, and they're looking for a larger type of house. The first-time home buyer, unfortunately, remains pretty well locked out of the marketplace.

The affluent buyers will be the primary targets of lenders operating outside the QM rules.

Lenders are going to offer over 43 percent, but the difference is they are going to want to make sure there is enough residual income that somebody does have the ability to repay For those people who are self-employed or who do have substantial proven income, there will be ways to justify allowing over 43 percent debt-to-income.

While Lenders does not anticipate hiking rates for these borrowers, the banks will underwrite the borrowers to the highest possible payment of an adjustable-rate loan.

Lenders really feel that they're just increasing the diligence involved in the underwriting but not necessarily increasing the risk, therefore theye are not anticipating increasing rates that lenders are currently offering customers.

While the mortgage industry initially fought the new rules, claiming no one could operate outside them, more are now saying they will. Wells Fargo said it will do non-QM loans and keep them on their books.

It looks like a nice niche from a lenders perspective because they are not going to have as much competition. Certainly they are going to have much more regulatory risk. The risk of operating outside the QM box is that a borrower can dispute, and basically win, if lender try to foreclose if there's a problem down the road.

Most lender who are operating outside QM say the loans will be underwritten pristinely, and every document will be checked. They will lend to only the prime and super-prime borrowers. There is, however, the risk that as the market settles into these rules, others, seeking greater returns, will look to less credit-worthy borrowers and charge them higher rates for their higher risk. In other words, here come the new sub-prime.

　

I think we're going to see the worst behavior in the marketplace as a new breeds of companies coming into the non-qualified mortgage area, where they can get to see much higher yields.

These would likely be cash rich nonbank lenders using private capital to fund the loans. As for the mainstream banks, the new mortgage rules will likely be an inconvenience for some borrowers and a roadblock to others.

One thing is certain: Mortgages will get more expensive, due to an improving economy, more lending rules, tighter underwriting standards and the Federal Reserve's pullout from mortgage-bond buying. How lenders choose to operate in that environment will be the story for years to come.

By Tad45

Dan Humphrey

I will see you at the top!