Fri, June 10, 2011
Federal Agencies Propose Tougher Mortgage Criteria
The Washington Post reported this week that rules being drafted under the Dodd-Frank Wall Street Reform and Consumer Protection Act will likely have the effect of making it tougher for borrowers to qualify for the lowest mortgage rates available.
One provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act was a requirement for several federal agencies to draft rules that would to improve the quality of mortgage loans that qualify for securitization. When a loan is “securitized,” instead of a bank making a mortgage loan and retaining it, all or part of the loan is bundled with other loans into a security that is then sold. This practice, while it made mortgages more available, also tempted lenders to take greater risks with the loans that were made.
The new proposed rules require that if a loan does not meet certain standards, a bank must retain at least a 5% in the loan – in other words, it must share in the risk of a loan default for such loans. The rules require that qualifying loans must be for no more than 80% of the home’s value, the mortgage payment must be less than 28 percent of a borrower’s gross monthly income, and total debt service (including credit cards and all loans) must not exceed 36% of the borrower’s gross income.
Borrowers who cannot meet these criteria would pay higher fees and interest rates. An analysis by CoreLogic, a mortgage research firm, indicates that almost 60% of those who bought homes last year would not meet the new loan criteria. These criteria would not apply to loans backed by the FHA, Fannie Mae, or Freddie Mac, but these agencies will probably be backing a smaller proportion of home mortgages in the future.
The long-term impact of the rules, if they are implemented, would be that some borrowers would stay out of the housing market, while others would pay more for loans.
There are also tax reform proposals being floated that would reduce or eliminate the Federal home mortgage interest deduction. The effect of both changes would be downward pressure on home prices, so they will likely be hotly debated before anything is changed.
