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How Mortgages Will Change This Year

by J. Marshall Pearson

Changes in Government Regulation

Perhaps the most important piece of legislation to real estate agents is the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly known as “Dodd-Frank”). Its new regulations are likely to cause huge changes in the mortgage industry, which will cause a massive ripple effect in the real estate market. Under this contentious act, banks will be issuing only “Qualified Mortgages” (QM), which are loans made for buyers that fit a number of specific criteria, such as: a 43 percent debt-to-income ratio; the limiting of the fee paid to banks providing mortgages at 3 percent of the principle; and the eight different criteria that reasonably guarantee the borrower’s “ability to repay.”

Those criteria are stated by the Consumer Financial Protection Bureau (CFPB) as the homebuyers’ “current or reasonably expected income or assets; current employment status; the monthly payment on the covered transaction; the monthly payment on any simultaneous loan; the monthly payment for mortgage-related obligations; current debt obligations, alimony and child support; the monthly debt-to-income ratio or residual income; and credit history.”

These standards aim to protect both consumers and banks while limiting predatory sub-prime lenders. Banks have been sustained by the government for the last few years, but 2014 will mark the end of that era, and mortgage rates will react accordingly. That is, they are projected to increase steadily throughout the year. In 2013, the mere discussion by the Fed to lessen its support of banks caused rates to increase.

Those new rules are helping create a safety net that has long been absent from the industry. Banks are protected from providing loans to unqualified buyers, and consumers are assured that banks are complying with a set of regulations that minimizes oversights. The Dodd-Frank Act created the CFPB, which provides that protection in the form of, most notably, Dodd-Frank’s ability-to-repay (ATR) and QM standards. There are hundreds of pages of legislation being implemented; homebuyers and agents must take care when deciding with whom to do business.

Steve Calk, the chairman and CEO of the Federal Savings Bank, believes that in 2014, it will be vital for consumers that mortgages are handed out by institutions having both the resources and staff to ensure that all federal regulations are followed.

“We believe that there has never been a more important time to have a financial institution making the loan,” he says. “There are too many things that can go wrong, that can tie up everything if [buyers] don’t have a fully underwritten pre-approval by the actual lender.”

Aimee Renkes, a vice president of mortgage lending at Guaranteed Rate, believes that the QM standard set forth by Dodd-Frank is merely reinforcing practices that have been in place for several years in the mortgage industry, especially concerning financial institutions. In addition, the QM changes will only affect about 10 percent of the country nationwide.

“I think ultimately, [Dodd-Frank] has put provisions into place so that, in the future, if people want to get more lax with their lending criteria, they are going to have a harder time doing it,” she says. “But the market has already been making that correction for the past few years. QMs are just going to keep things status quo, a level where they’ve been for the past couple of years.”

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