Mortgage Lending Future Landscape
In an attempt to balance lender’s approach to mortgage lending the new rules aim at a policy that is neither too easy nor too hard. In the words of director Richard Cordray the new rules in effect represent the “true essence of responsible lending.” We want to “make sure people who work hard to buy their own home can be assured of not only greater consumer protections but also reasonable access to credit.” The main focus is as follows:
- Total debt must be no more than 43 percent of annual income including existing debt such as credit cards and student loans.
- Gimmicks such as “teaser rates” and large “balloon payments” down the road will not be allowed.
- With the focus being on the consumer’s ability to repay there will be no restrictive requirements for down payments or credit scores.
- Financial records must be verified and inspected.
- There will be a 3 percent cap on fees and origination costs.
- Lender must give borrower written notice of intent to foreclose within 15 days of the second missed payment.
The lender will be barred from completing the foreclosure if the borrower applies in writing for help within 37 days of the scheduled foreclosure. This feature is to ensure that the borrower has time to ask for help. This ends “dual tracking.” Dual tracking means starting the foreclosure while the application for help is being processed.
The strict cap on debt will not take effect immediately. The cap will be phased in over a 7 year period. Balloon payments will be allowed for certain small lenders in rural or under served areas.
There will be exceptions for Community Banks, Credit Unions and Non profits that work with low and moderate income consumers. Banks will be free to make loans not considered “qualified mortgages” without federal backing. There will surely be a market for this at higher interest rates.
The Mortgage Lending Future Landscape rules will “Protect consumers and help straighten out the housing market by rooting out reckless and unsustainable lending while enabling safer lending” according to Mr. Cordray.