Are you in the market for a house and worrying about whether it will be harder to get a mortgage after Jan. 10, when new federal rules kick in? Don’t fret. For most people the rules won’t make much difference. If the new rules do prevent you from landing a mortgage loan, it could be a sign that you aren’t financially ready for homeownership.
The rules put out by the Consumer Financial Protection Bureau require lenders to make “a reasonable, good-faith determination” that borrowers can repay their loans. For so-called qualified mortgages, there are additional standards which give their issuers legal protection against charges of inappropriate lending. Qualified mortgage loans are no longer than 30 years and have fees and points totaling no more than 3 percent of the loan’s value. Lenders managed to win a reprieve on another piece of the standard, which is that a borrower’s total debt payments (including credit cards and student loans) can’t exceed 43 percent of income. Loans eligible for purchase by Fannie Mae (FNMA) or Freddie Mac (FMCC) or for insurance by federal agencies don’t have to meet that debt-to-income standard until 2021.
The conservative Heritage Foundation argues that the rules “unleash predatory regulators” and unfairly restrict borrowers’ choices without dealing with what it says are the real causes of the housing bubble and bust—namely, loose monetary policy and various rules promoting homeownership for low-income families. On the whole, though, the rules won’t make a huge difference for most families—simply because lenders have already tightened lending standards drastically. The best evidence for that is the Mortgage Credit Availability Index published by the Mortgage Bankers Association. According to the association, the index would have stood at around 800 in 2007 if it had existed at the time. It’s around 110 now, meaning it’s much harder to get a mortgage than before the housing crash.
That’s not to say that preparation for the new rules isn’t having any effect. As the Mortgage Bankers Association puts it:
“A significant number of loan programs allowing for more than 95 LTV [loan-to-value] and low-to-mid range minimum FICOs were either discontinued in November, or transitioned into programs with lower LTV maximums and/or higher minimum credit scores. Investor pull-back from programs with greater than 30-year terms and interest-only programs continued as the industry prepares for new regulations coming into effect in January 2014.”
But even with that tightening, mortgage credit was easier to get in November than in all of 2012 and the first half of 2013. Starts on residential construction hit a five-year high in November, and sales of new homes are running near their highest since 2008 as well.
The bigger influences on housing affordability in 2014 will be the economy (whether it will grow strongly enough to create jobs and lift incomes) and interest rates (whether the Federal Reserve’s tapering of purchases of Treasury bonds and mortgage-backed securities will push mortgage rates out of range).
Under the new mortgage rules, the people who are most likely to get rejected for a loan are ones who live in states where housing prices are very high or where the bounce-back from the crash has been weakest. Also vulnerable are young people who are hoping to “grow into” their mortgages by progressing in their careers and winning raises. It will be harder to squeeze into a home with an adjustable-rate loan because the rules require lenders to take into account how high the rate might get over the life of the loan, not just the teaser rate.
CoreLogic (CLGX), a real-estate data company, calculates that 12.8 percent of new mortgages in 2012 didn’t meet the “qualified mortgage” standard. You can still try to get a loan even if it’s not a qualified mortgage, but it will be considerably harder. Then again, that’s not necessarily a bad thing. If banks and the government are telling you that you can’t afford a house, they just might be right.