Mortgage mania petered out on its own with the housing bust of the last few years. The Consumer Financial Protection Bureau’s mortgage guidelines, released last week, are tailored to prevent such a fever from gripping lenders and consumers ever again. The CFPB rules, which take effect next January, outlaw most of the exotic loan products and unscrupulous processes that contributed to nearly four million mortgage defaults since September 2008. The CFPB is a federal agency founded in 2010 as part of the Dodd-Frank financial overhaul. The rules ban high-cost mortgage products such as interest-only loans and those in which the principal balance grows over time, known as negative amortization loans. The CFPB also placed limits on products with large, lump sum payments due at the end of a term, known as balloon loans, and on repayment standards for adjustable-rate mortgages. Lenders also received direction on the underwriting standards and closing-cost fees. The CFPB defined what constitutes a “qualified mortgage” and limited lender liability on loans that meet that standard. Local residential real estate insiders applauded the moves, although all compared the CFPB to the farmer who closes the barn door after the horse has already escaped. “This is not a look back or a look at what’s going on now but what could go on in the future,” said Ed Sibbald with Georgia Southern University’s Center for Excellence in Financial Services. “Nobody is making these ninja loans anymore. Nobody is handing mortgages out to consumers who can’t verify their income. “This is to protect future consumers from being as stupid about things as consumers were a decade ago.” Borrower debt ceiling The CFPB’s mortgage reform efforts center on an “ability-to-repay” standard. Lenders must review eight areas of a potential borrower’s finances. The exam includes income, employment status and debt obligations, among other things, and lenders must verify the information through third parties, such as the Internal Revenue Service, credit bureaus and the applicant’s employer. To receive the “qualified mortgage” designation, the potential borrower’s monthly debt, calculated with the mortgage payment included, must not exceed 43 percent of gross monthly income. But the 43 percent threshold is rarely tested nowadays, according to lenders. Wells Fargo, the nation’s largest mortgage underwriter, uses a 36 percent debt-to-income ratio as its rule of thumb. Another large mortgage lender locally, SunTrust, has an unofficial cap of 40 percent. The CFPB estimates nearly 75 percent of mortgages written in 2011 met the 43 percent standard. Another 20 percent met a second test, which allows loans that exceed the 43 percent threshold but still receive approval through automated underwriting engines utilized by mortgage buyers Fannie Mae, Freddie Mac and the Federal Housing Administration. “Everybody is used to making better loans at this point,” said Michael Caputo, a mortgage loan officer at Starkey Mortgage. “It’s a vanilla world now. Uniform standards make it easier for consumers to make an educated choice.” Potential borrowers have shown an eagerness to make wiser choices as well. Whereas the first question a homebuyer posed prior to the bust was “How much can I get approved for?” the question today is “How much can I afford?” according to Caputo. Today’s buyer is more financially aware than ever, acknowledges local Realtor Vicki Linscott with Keller Williams Coastal Area Partners. “They are not taking the lender’s word for anything any more on what they think they can do,” Linscott said. “They know what they want to do, not what they can do. Nobody is going out there and buying more house than they can afford.” Loopholes and pitfalls The CFPB’s rules could result in several negative unintended consequences, insiders acknowledge. Including the Fannie Mae, Freddie Mac and FHA test as an ability-to-repay standard is potentially troublesome. The three groups are all controlled by the federal government, and consumers turned down for mortgages could apply pressure on their elected officials to push for a relaxing of the Fannie/Freddie/FHA guidelines. The limits on balloon loans, meanwhile, could have a significant impact on community banks. Few small banks will carry long-term fixed-rate mortgages in their portfolio, selling them instead to Fannie, Freddie, private investors, etc. But some customers prefer the bank hold their loan. The bank’s answer, in most cases, is to issue a short-term balloon mortgage that is renewed at the end of the term at the current interest rate. This practice insulates the banks against long-term interest rate changes. “And it’s not like banks are taking advantage of these customers with some sky-high rate,” Georgia Southern’s Sibbald said. “There is already a limit on how high above the prime rate community banks can charge on a short-term mortgage.” The CFPB has promised exceptions for the community banks, “but we haven’t seen that yet,” Sibbald said.
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