Pleasanton Weekly

Real Estate - March 28, 2014

New mortgage rules protect against risky loans

Borrowers must show they can repay mortgage over time

by Jason Alderman

Good news for people shopping for a mortgage and for current homeowners facing foreclosure because they can no longer afford their home loan.

New mortgage regulations drafted by the Consumer Financial Protection Bureau recently took effect, and they provide a slew of new rights and protections for consumers.

One cornerstone of the new mortgage rules is that lenders now are required to evaluate whether borrowers can afford to repay a mortgage over the long term, that is, after the initial teaser rate has expired. Otherwise, the loan won't be considered what's now referred to as a "qualified mortgage."

Qualified mortgages are designed to help protect consumers from the kinds of risky loans that brought the housing market to its knees back in 2008. But obtaining that designation is also important to lenders because it will help protect them from lawsuits by borrowers who later prove unable to pay off their loans.

Under the new ability-to-pay rules, lenders now must assess and document multiple components of the borrower's financial state before offering a mortgage, including the borrower's income, savings and other assets, debt, employment status and credit history, as well as other anticipated mortgage-related costs.

Qualified mortgages must meet the following guidelines:

* The term can't be longer than 30 years.

* Interest-only, negative amortization and balloon-payment loans aren't allowed.

* Loans over $100,000 can't have upfront points and fees that exceed 3% of the total loan amount.

If the loan has an adjustable interest rate, the lender must ensure that the borrower qualifies at the fully indexed rate (the highest rate to which it might climb), versus the initial teaser rate.

Generally, borrowers must have a total monthly debt-to-income ratio of 43% or less.

Loans that are eligible to be bought, guaranteed or insured by government agencies, such as Fannie Mae, Freddie Mac and the Federal Housing Administration, are considered qualified mortgages until at least 2021, even if they don't meet all qualified mortgage requirements.

Lenders may still issue mortgages that aren't qualified, provided they reasonably believe borrowers can repay and have documentation to back up that assessment.

New, tougher regulations also apply to mortgage servicers, the companies responsible for collecting payments and managing customer service for the loan owners. For example, they now must:

* Send borrowers clear monthly statements that show how payments are being credited, including a breakdown of payments by principal, interest, fees and escrow.

* Fix mistakes and respond to borrower inquiries promptly.

* Credit payments on the date received.

* Provide early notice to borrowers with adjustable-rate mortgages when their rate is about to change.

* Contact most borrowers by the time they are 36 days late with their payment.

* Inform borrowers who fall behind on mortgage payments of all available alternatives to foreclosure (e.g., payment deferment or loan modification).

With limited exceptions, mortgage servicers now cannot initiate foreclosures until borrowers are more than 120 days delinquent (allowing time to apply for a loan modification or other alternative), start foreclosure proceedings while also working with a homeowner who has already submitted a complete application for help, or hold a foreclosure sale until all other alternatives have been considered.

For more details on the new mortgage rules, visit www.consumerfinance.gov/mortgage.

Bottom line: People should never enter into a mortgage (or other loan) that they can't understand or afford. But it's nice to know that stronger regulations are now in place to help prevent another housing meltdown.

Jason Alderman directs Visa's financial education programs.

Comments

Posted by Mitchell, a resident of California Reflections
on Nov 18, 2014 at 1:00 pm

These news are great because it's time when interest rates on mortgages are falling down and housing becomes more affordable. FCPB is doing a good job by protecting consumers from loans which they can't pay. Some consumers take out home loans and then use services like Web Link to borrow money to make payments on their mortgages. It's important to keep housing affordable but at the same time prevent people from getting into the debt burden. It will allow also to decline national foreclosure rate and it means that more consumers will successfully pay down their loans.


Posted by I pay my Debts, a resident of Another Pleasanton neighborhood
on Nov 18, 2014 at 5:40 pm

"Bottom line: People should never enter into a mortgage (or other loan) that they can't understand or afford."

How about this -- if you agree to take out that loan, which means agreement to pay it back in full, then if you default you can never again in your lifetime qualify for a home mortgage. So much of this last crisis was caused by the greedy realtors the greedy mortgage brokers and the gullible wanna be homeowners. Making them qualify for the increased interest rates is a good start. Just put some teeth into the penalties if they decide to default. Giving those deadbeats a tax free get out of jail card has nearly bankrupted us all.


Posted by yep, a resident of Pleasanton Meadows
on Nov 19, 2014 at 8:21 am

To I pay my debts - I think banning people for life if they default is a bit harsh. They already have to wait 7 years after a foreclosure before they can get another mortgage. The hope is that after 7 years they can re-establish themselves as creditworthy individuals.
Besides, permanently eliminating folks from getting mortgages means the pool of potential buyers for homes gets smaller which negatively affects those who want to sell, realtors, home inspection firms, contractors, pest control companies, title companies, appraisers, etc.
As the housing market goes, so goes the economy.
Once you throw a rock in that pond, the ripples are widespread.


Posted by I pay my Debts, a resident of Another Pleasanton neighborhood
on Nov 19, 2014 at 8:53 am

I am not certain of the rules when it is a foreclosure but I can tell you for certain that a short sale -- which is also walking away from debt with no consequences -- is not a disqualifier for a new purchase. My co-worker decided that since his house was underwater he no longer wanted to make the payments. He COULD make them he just did not WANT to make them. So he did a short sale. Before that sale even closed he was under contract to buy another house. He was scrambling to come up with all of about 5% for the down payment.

He suffered NO credit problems, NO financial recourse and he paid NO tax on all of the debt that he walked away from. A lifetime ban on institutional or government backed mortgages for deadbeats like him is quite appropriate. The taxpayers should not have to pay for the greed and stupidity of people like that.


Posted by BobB, a resident of Another Pleasanton neighborhood
on Nov 19, 2014 at 9:12 am

" Giving those deadbeats a tax free get out of jail card has nearly bankrupted us all."

That was only a small part of it. What made the financial downturn into a panic was the derivatives speculators at companies at AIG. They put the entire financial system in jeopardy.


Posted by Also Paid Own Debts, a resident of Another Pleasanton neighborhood
on Nov 19, 2014 at 11:15 am

I think it's wrong those who walked away get a clean slate. My son in his mid-fifties, whose house was under water because of the market, although he put 25% down on a 30 yr FIXED, depleted his retirement savings to keep the house. Meanwhile, his employer went broke, closed doors, and there were few other jobs at that time, so couldn't refi without a job. Now he's late 50s, no retirement, and will have to work forever. Now employers don't want higher end, experienced employees, so just use them to fill short-term 'projects', with no costly 'benefits'. That is today's America, and today's middle-income, white, experienced males, facing retirement age. The 'resetting' of America, and angry electorate. No rewards for playing by the rules and honoring your mortgage obligations. Government, (taxpayers) rewards cheaters and walkers and hammers the honorable.


Posted by I pay my Debts, a resident of Another Pleasanton neighborhood
on Nov 19, 2014 at 11:30 am

"No rewards for playing by the rules and honoring your mortgage obligations. "

Actually, there are rewards in the tax deductions for mortgage interest and property taxes to those who pay it. That is also part of the problem. People are sucked in with the promise that "the government will pay for half of your house" via tax deductions which only applies if you actually have income to be taxed. In Canada mortgage interest is not deductible. When you sell your home you get to keep the money because that home never generated tax deductions for you. They do not have the constant "I need the tax writeoff" mentality that people have here. They don't use their homes as ATMs to fund their overspending.

When Congress decided to allow defaulting homeowners to wipe out that debt tax free they should have made those same people file amended tax returns to repay all of the tax deductions they had claimed for mortgage interest. Instead, the deadbeats got it both ways -- kept all of the tax money from the writeoffs and paid no taxes on all of the forgiven debt.

In the case of APOD's son, he is not the person that I am addressing. I am addressing those who walked away when they could have paid and they suffered nothing for it. As for the derivatives and other big financial scams, I don't know enough to comment other than the big banks and brokerages all deserved far worse than they got from it.


Posted by C-Student, a resident of Downtown
on Nov 19, 2014 at 1:16 pm

Riddle me this APOD would your son still be in his house if the value had gone down another 25-30% at the height of the crisis? I would argue every homeowner benefitted by the government's intervention into the housing crisis, to what degree is debatable, but their actions essentially place a floor on residential real estate prices.


Posted by agree with APOD on at least one item, a resident of Pleasanton Heights
on Nov 19, 2014 at 3:20 pm

Quote - Government, (taxpayers) rewards cheaters and walkers and hammers the honorable.

Off topic but the latest example this is Obama's imminent plan to give amnesty to 5 million illegal aliens who have snuck into the country and hid out long enough. Many of these are sick, uneducated, unskilled folks, some are running from the law. The doctors, lawyers and business owners are staying put in their own countries for the most part.
Meanwhile, there are plenty of honorable folks in other countries who have paid their fees, filed their paperwork and are patiently waiting in line who are snubbed by this administration. They can't enter the US unless they can prove they are healthy, not wanted by the police and have some proven form of a job or family support.

I'm all for immigration. Just so long as we can check out the people trying to get in and weed out the ones that shouldn't come here.


Posted by WeAllPay, a resident of Another Pleasanton neighborhood
on Nov 19, 2014 at 4:44 pm

Perfectly reasonable to be angry at the homeowner who walks away from his debt - what I can't understand is why no one seems to care about the people who created the disaster. Some mortgage lenders made as much or more money selling mortgage-backed securities and collateralized debt obligations as they made issuing loans. The quality of the loans didn't matter - just sell it fast! More loans meant more money. So not only were lenders essentially 'walking away' from the debts they created, they were making money on the deal. The real estate bubble this created, along with and convoluted gaming practices that became the norm with investment banking, burst in a way that hurt everyone in the U.S. We paid with inflated home prices, we are still paying for their fraud with our taxes that went to bail-outs, we are paying with an economic downturn that kicked the legs out from under many honest businesses, and paying with a future of economic loss to dig out from. So get mad at the guy who got caught up in a cheating game, but why not the cheaters?


Posted by Also Paid Own Debts, a resident of Another Pleasanton neighborhood
on Nov 20, 2014 at 7:55 am

C, you miss the point, My son 'did' stay in his house when prices plunged and continued to make every payment on time, depleting his savings/retirements. I do not agree with your 'floor' savior. That had no effect on him, he kept his house through it all, making every high interest payment. But again, floor helped deadbeats. The guy above who walked away leaving US stuck with the bill, had enough cash to buy another house without penalty...sweet, for HIM!!!
The residual of employers closing doors and being left unemployed with no severance (co went broke). Not many years left to replace savings/retirement. But government rewards most slackers and walkers. What kind of 'senior program' is there for the honorable. Political whores stay up at night thinking of ways to pass out taxpayer money to slackers and walkers, but never the silent honorable who just keeps paying.
To make it worse, all we get from unions is more greedy whining for more, more, more, for their financially 'risk-free' lives. They are so not part of our 'real' world. They expect us to keep giving to them with a smile...not!


Posted by I pay my Debts, a resident of Another Pleasanton neighborhood
on Nov 20, 2014 at 9:34 am

@ APOD - I would have to wonder what sort of loan your son had. If he had a conventional loan, he really did get screwed through no fault of his own. If he took out a loan at an artificially low rate with an adjustment in 2 years, counting on the market to go up and a new low rate loan to be available, then it was straight forward gambling. So many who lost their homes were promised by realtors and loan brokers (who were a huge part of the problem) that even though the adjusted rate would be large it would be no problem to refi since the property would have increased in value. Not what happened.

More than just buyers contributed to this but in every case the underlying factor was greed. Greedy brokers working with greedy lenders selling to greedy bankers all providing homes for greedy and uneducated buyers who were never in their lifetimes going to be able to make the adjusted payments. When the financial market tanked it took everything else with it. Economics does not happen in a vacuum, all sectors suffered. If these new rules make it harder, perhaps even impossible, for marginally qualified potential buyers to get a home that will ultimately be good for everyone. No massive defaults, no massive bailouts and a more balanced housing market. If the buyer cannot afford the highest payment during the life of the loan then they cannot afford the house. Period.


Posted by C-Student, a resident of Downtown
on Nov 20, 2014 at 12:04 pm

@IPMD
I'm not so sure adjustable rate mortgages were the death knell of borrowers. The 3yr, 5yr & 7yr fixed doing 30 adjustable rate mortgages originate between 2006 - 2008 have lower rates now then when they were originated. Most were written as margin plus index , where the typical margin was 2.75% and the index was the 1 yr treasury rate. Those who still have them have been enjoying a sub 3% mortgage for years. Nobody anticipated treasury rates to be zero, not even the banks.


Posted by Damon, a resident of Foothill Knolls
on Nov 20, 2014 at 12:35 pm

@C-Student

I don't think that IPMD was referring to standard adjustable rate mortgages. He was talking about the more exotic types of mortgages that occurred during the bubble years that were known to be ticking time bombs once they hit their adjustment dates. You know: those negative-amortization, interest-only, no-documentation, no downpayment loans that were being given out like free candy to anyone who had a pulse. Everything was clear sailing with those types of loans - until they hit their adjustment dates.

Actually, there was a rationale for those crazy negative-amortization, interest only loans with their inevitable "reset" or "adjustment" dates. IF you assume that housing prices will increase at least 10% a year forever, then buying a house with a negative-amortization, interest-only loan makes perfect logical sense. In fact, buying five houses with five negative-amortization, interest-only loans makes even more sense, and a lot of people did just that. Unfortunately for them, the basic assumption that they made - that housing prices would increase by at least 10% per year indefinitely - was flawed.


Posted by C-Student, a resident of Downtown
on Nov 20, 2014 at 1:23 pm

I agree the loans you mention were problematic but IPMD states in his second sentence "conventional". I'm assuming that's what he meant and the loans you're referring to are something other than conventional?


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