BluefoxToday blog : Will The New Lending Rules Put The Squeeze On Home Sales?

Will The New Lending Rules Put The Squeeze On Home Sales?

While consumers will are sure to benefit from recent changes enacted by The Federal Reserve, will the new lending rules put the squeeze on home sales? The changes amend Regulation Z, Truth in Lending, and are “intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting home ownership.”

 

The rules will now affect all mortgage lenders, not just state-chartered institutions, as was the case under the old system, and offer protections to those with weak credit. Establishing a new category called “higher-priced mortgage loans,” those first-lien mortgages with an annual percentage rate 1.5% or more above an “index” of average prime rate offers. The rules will also cover those subordinate lien mortgages, with an annual percentage rate of 3.5% above the index.

 

There are four key provisions in the regulations which will:

Prohibit lenders from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.

Require creditors to verify the income and assets they rely upon to determine repayment ability.

Ban any prepayment penalty if the payment can change in the initial four years.

Require creditors to establish escrow accounts for property taxes and homeowner’s insurance for all first-lien mortgage loans.

 

The rules also address deceptive advertising practices by lenders; actions that encourage inflated appraisals; and abusive fees from loan servicers.

 

Set to take effect on October 1, 2009, with the exception of the escrow requirement, the new rules will offer some needed protections for the majority of consumers, but may actually limit the ability of some to obtain a mortgage. Not all “sub-prime” loans of recent years were fraudulent; and many whose income is difficult to verify—self employed, servers in restaurants, and others—will find it difficult or impossible to obtain mortgages under the new rules. We can only hope the benefits of these new regulations outweigh the deficiencies.

 

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Comment balloon 31 commentsJohn Mulkey • September 29 2009 07:55AM

Comments

But aren['t these essentially good things?

Posted by Lise Howe, Assoc. Broker and Attorney Licensed in DC, MD, VA, (Keller Williams Capital Properties) over 8 years ago

Lisa - Generally yes. Unfortunately the new rules are coming about 8 years late, and while they should help avoid another subprime mess, they will keep out some who are truly qualified.  Overall, it's a positive move.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

It will be a tough time for commission workers as well. Like ourselves. I try and take all write offs but I may have to forgo some just to make the DTI better.

Posted by Chip Jefferson (Gibbs Realty and Auction Company) over 8 years ago

Laura - And that's a tough choice we sometimes have to make.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

Positive for most, but as you stated, pardon the pun..Stated is no longer an option for self employed, commission based workers. That puts alot of folks out of the market.  Of course NINA should never of been.

Posted by Dick and Dixie Sells, Realtors, Tampa Bay Florida Homes For Sale (Sells Real Estate, LLC) over 8 years ago

Ahh yes, another piece of paper that will stop those who want to practice deception.

Posted by Associate Broker Falmouth MA Cape Cod Heath Coker, Heath Coker Robert Paul Properties Falmouth MA (http://www.CapeGroup.com & http://www.REindex.com) over 8 years ago

I think these changes are necessary, although it doesn't make me feel better about my own prospects for purchasing a home.  Thankfully, I don't plan on moving soon. 

Posted by Lina Robertson, REALTOR® Serving Springfield, Nixa and Ozark, MO (RE/MAX Solutions and RE/MAX House of Brokers) over 8 years ago

Dick & Dixie - We'll see what the long-term repercussions are; and congrats on winning the contest!

Heath - And those who are committed will find another opportunity. 

Lina - We'll probably see some additional modifications and attempts to improve the overall system.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

It does seem like this process will screen out many that still are good credit risks.  Very unfortunate that these kind of rules have to be legislated.

Posted by Charles Perkins (Charles G. Perkins, CPA) over 8 years ago

Charles - I understand the intent, but some will suffer from the "unintended" consequences.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

The Federal Reserve is no more Federal than Federal Express and there are no reserves.

 

Don't believe me?  Then what branch of the Federal Government does it belong to?? Give up?

None.  It's not a part of the government...it's a private bank and no one knows who owns it.

And it's never been audited by anyone, let alone the government.

 

Learn about this scam by reading the book The Creature From Jeykell Island by G. Edward Griffin.

 

The money in your wallet is bogus.  The gold is long gone from Fort Knox. And we are all being played for suckers.  Haven't you been reading about the fall of the dollar as the world reserve currency?

 

Wake up, or get financially flattened when the dollar crashes.

Doug

Posted by Doug over 8 years ago

Yes I believe that it will be more restrictive and difficult for many to qualify for a loan...I also believe as an industry we will figure out how to roll with the flow.

Remember a year ago when the Down Payment Assistance went away - it was going to be a disaster...or in January when FHA downpayment went from 3% to 3.5%...oh my gosh, how as anyone going to be able to afford a home?

I believe there is too much sence of entitlement when it comes to the houseing market - which is good for us because we get to sell more homes and write more loans...but is everyone suppose to own a home?  Sounds kind of communist to me....

Posted by John Occhi, SRES,CPRES.ePRO - Temecula-Murrieta CA Real Estate (Mason Real Estate) over 8 years ago

I hear that debt to income ratio standards are changing as well.  It's going to get harder for a lot of people to qualify.  I'm sure that some of that has to do with all the buy and bails, but legitimate buyers are still in for a bumpy ride!

Posted by Susan Lehmkuhl, Associate Broker (Buy and Sell Smart Realty, LLC) over 8 years ago

As mentioned above we need a good stated options.  I have rented a house for 4 years and have been able to pay the rent.  However, my income does not allow me to buy a home with a mortgage equal to my rent, or even close.  The old FHA would have allowed me to do so.

Posted by Gene Riemenschneider, Turning Houses into Homes (Home Point Real Estate) over 8 years ago

I love the banning of pre-payment penalties!  thanks!

Posted by Jason Burkholder, Sales Manager, Assoc. Broker, Realtor, e-Pro (Weichert, Realtors - Engle and Hambright) over 8 years ago

I think this will hurt those for the idiot mistakes and greed of the banks stated income is nothing new but when I first started doing loans you had to have at least a 680 to get one then it got as low as a 580 who in the hell loans a person stating there income with a 580 score give me a break.  Then be shocked and in awe when the loans goes bad???  The odds are that if you have a 700 fico you may be that person that can pay his debts but a 580 ?? how about 620?? They went from one extreme to the other and yes it will hurt, is it over done?? you bet it is.

Posted by Gene perez (Greater Mortgage Solutions & Valley Hills Realty ) over 8 years ago

Seems to me we are shutting the barn door after the horse is out.

Posted by Steve Andrascik (Lake Mead Area Realty) over 8 years ago

John - I believe the changes will benefit housing overall, but there are some who would like to buy, have good credit, but won't qualify because of the new rules. We'll see how it all works out.

Susan - I understand the reasons behind the new rules, but do believe that some will be hurt.

Gene - My current mortgage is a "stated income" and I've never missed a payment.

Jason - Most of the changes will benefit consumers.

Gene - Government always takes a "ready, fire, aim," approach. That's why their involvement is always frightening.

Steve - Yes, seven years ago would have been more appropriate.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

The stated income mistake was letting the loans go for a 580/620 etc.  The stated loans for 720 going away.  Big mistake.

Posted by Mike Henderson, HUD Home Hub - 303-949-5848 (Your complete source for buying HUD homes) over 8 years ago

Mike - I agree. As I mentioned in a previous comment. My current mortgage is stated income, and I anticipate problems with future borrowing.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

John seems we are back to real estate 1995 before the banks got greedy and people decided not to read the fine print and push the envelope. It's a shame because in MI this mortgage mess has caused many many hardships and totally ruined our real estate market. Just a tad bit late!

Posted by Ed & Cindy Knight (Rooms Realty) over 8 years ago

Ed & Cindy - I suspect the government will soon forget the causes of the housing crisis, and begin making the same mistakes once more.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

John, I say these are all good things and are probably overdue in protecting consumers. BUT, they've (govt) done such a bang-up job on all the latest changes that I'm going to just vote that it will be a disaster!  Cynical I guess.  Everytime the government tries to do one thing, the opposite happens.

Posted by Lyn Sims, Schaumburg IL Area Real Estate (RE/MAX Suburban) over 8 years ago

Lyn - They do seem to have a patent on "unintended consequences."

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

Over the last 15 years I originated approx.  $750 million in construction & mortgage loans.  At least 25% of my borrowers needed to go low doc, no doc, NINA, stated income, no income, etc.   Now the goverment has told all banks they cannot make a mortgage loan without proving the borrowers income.  Even my banker buddies agree, as they understand it, a potential buyer/homeowner could have a financial statement worth millions, but if they can't prove their income, no mortgage loan!  If you read through the regs further, they do state that if the borrower has liquid assets to sustain a mortgage payment for 7 years the lender can use their own discretion in making the loan.  The problem is most banks will simply just pass on making the loan period for fear of being critized during a future exam. For clarification purposes, i'm talking about banks here which the FDIC and/or Federal Reserve Bank set policy.

What does all this mean?  It means we've taken thousands of potential buyers/homeowners and made them renters!

Yeah, it always bugged me making loans to individuals who said "my tax returns don't reflect all of my income, I deal a lot in cash", but the fact is, there are thousands out there who do not report all of their income, but they have assets & perfect credit.  DO WE REALLY WANT TO STOP LENDING THEM MONEY TO BUY A HOME?

I think not?  It was the true subprime lenders would give anybody that could breathe & had a social security number a loan, but they're pretty much history now.

Let's continue loaning mortgage money for the no doc, stated income, etc. borrowers, but put some requirements on them.   A previous good or excellent mortgage history, 20% down, 725 FICO scores, etc.  We can vary the down payment based on FICO scores just like Fannie Mae does on the rate.

It's just nuts to take all of these borrowers out of the market because of a few bad apples, i.e. those that got 100% financing and had never owned a home.

I'm my neighborhood outside of Dallas a mortgage company took a home that sold for $700,000 4 years ago, and worth it, and sold it for $500,000.  Another that sold 2 years ago for $650,000 went for $465,000 in 9 days.  No doubt, some of these mortgage servicers are giving homes away.  Why would you buy a new home when you can buy a 2-4 year old pre-owned for $150,000 under market?  This is what's killing the new home builder!

Being a W2 taxpayer all my life, it really bugged me when I was making loans to these borrowers who didn't pay their fair share of taxes (like me), but the question is, do we want them as homeowners or renters?

Your thoughts please!

 

 

Posted by David Cook over 8 years ago

Well John the rules are always changing. It is with good intentions. However, like you said (unfortunately) it may affect business owners.

Posted by Mark Velasco, Listing Agent-Whittier & Surrounding ciities (Sharpstone Realty, Inc) over 8 years ago

David - That's the point. And it's not just those who choose not to report all their income. Many self employed who take every possible deduction can't show sufficient income to justify the loan they want, while, in reality, they can afford to make the payments. And you have waiters/servers whose business demands cash and who, in most cases, won't qualify. While the new rules will eliminate some from the market that shouldn't be there, they have the potential to do a great deal of harm also.

Mark - We'll see if adjustments are made.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

Without over simplifying the issue, what if we turned back the clock, and had the same lending rules as we had 20 years ago? It worked almost flawlessly, and the housing market was relatively stable.

Posted by Jon Budish (Resident Realty) over 8 years ago

Jon - I suspect you'd hear a lot of complaining from lenders, Realtors, politicians, and consumers, most of whom would like to continue the "artificial" market.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

These rules seem to make sense. Just a few years too late.

Posted by Wayne B. Pruner, Tigard Oregon Homes for Sale, Realtor, GRI (Oregon First) over 8 years ago

Wayne - Yes, we made lots of "unjustified" loans just a few years ago.

Posted by John Mulkey, Housing Guru (TheHousingGuru.com) over 8 years ago

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