Will New Rules Eliminate 60% of Mortgages? Two new mortgage regulations designed to reduce lender risk may actually make it impossible for millions of Americans to own a home in the future!
The rules – one of which has already been finalized and one that's still in the works – are both part of the U.S. Treasury Department's initiative to make the mortgage industry less risky for lenders by placing more burdens on borrowers.
But just how strict are the new guidelines?
Experts say 60% of mortgage applications being approved today would be declined if the regulations were already in place.
Since the housing market collapsed in 2007, many lenders have voluntarily implemented higher underwriting standards on their own before granting a loan approval. After all, the main reason that the housing bubble burst was that people were given mortgages that shouldn’t have – and then couldn’t pay their loans back. In the years since, there hasn’t been a universal code or plan in place to prevent that from happening again. But there is now!
The Qualified Mortgage rule (QM rule), which was finalized last month, lays out a specific code of guidelines that prospective borrowers must meet for a lender to grant a home loan approval. The guidelines include a stricter debt-to-income ratio than is currently allowed, and it will eliminate all loans that require no or low documentation. In other words, only borrowers who can prove that they have the financial security to make a monthly mortgage payment will be approved, and lenders must make sure that they dot all their I’s and cross their T’s before agreeing to give out a loan.
If someone doesn't meet the criteria, they can still pursue a government-sponsored enterprise loan (GSE) or a Federal Housing Administration (FHA) mortgage – for now. For the next seven years those types of government-assistance loans are exempt, but after that time period, they must also confirm to the new rules.
A majority of home loans today are GSEs and FHA loans, and economists at CoreLogic say nearly half (48%) of the homeowners who were recently approved for these loans wouldn't make the cut down the road.
So, what about the other rule?
The other rule, which is still being finalized, is called the Qualified Residential Mortgage rule (QRM rule).
In order to meet this guideline, borrowers must be able to make a specific percentage down payment on the loan. While that actual percentage still hasn't been finalized, the number being thrown around is 10%, which is slightly above the national median (which currently sits at 9%).
The goal is to avoid the risk retention requirements that significantly raise interest rates, so the days of a zero down payment and borrowing 100% of the home's price will be a thing of the past.
Economists say the QM and QRM rules would remove 60% of loans, but would also eliminate 90% of the risk.
While it is true that these rules will make the goal of homeownership much harder to obtain, they are designed to ensure that only those individuals who can truly afford to own a home actually receive a mortgage. That way, there will be fewer delinquent mortgages, foreclosures, and short sales, and in turn, the still-recovering economy and housing markets will have a much lower chance of spiraling downward out of control again.
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