As bankers, real estate agents and others in the housing industry absorb thousands of pages of mortgage rules issued in the past week, they’re still waiting to see if U.S. regulators will set a minimum down payment for home loans.
Regulators including the Federal Deposit Insurance Corp. and the Federal Reserve drew protests in 2011 when they proposed a rule requiring lenders to keep a stake in mortgages with down payments of less than 20 percent. Bankers and consumer groups said such a requirement would shut creditworthy borrowers out of the market.
Now, regulators say they expect to release a final version of that so-called Qualified Residential Mortgage rule in the next few months. Together, the QRM rule and additional measures governing underwriting and servicing released by the Consumer Financial Protection Bureau in the past week will fundamentally reshape who can lend and who can borrow because banks will probably make only those loans that conform to the new standards.
“I have consistently warned of the regulatory tidal wave to come and it’s finally upon us,” David Stevens, president of the Mortgage Bankers Association said during a speech in Washington on Jan. 16. “These changes will impact business operations and the future of mortgage access for years to come.”
Stevens said his organization has received hundreds of e-mails and telephone calls from members trying to understand the new regulations, which were mandated by Congress in response to lax underwriting standards before the 2008 financial crisis.
The so-called Qualified Mortgage rule issued by the CFPB Jan. 10, weighing in at 804 pages, requires lenders to verify borrowers’ ability to repay their loans and offers legal safe harbor for lenders who follow guidelines for safe mortgages.
The CFPB offered strong legal protection for loans on which borrowers’ debt payments are no more than 43 percent of their income. Points and fees for such mortgages can’t be more than 3 percent of the total loan amount. Loans backed by the government through Fannie Mae, Freddie Mac, and the Federal Housing Administration automatically qualify for legal protection for the next seven years.
The CFPB stopped short of adding a requirement for a minimum down payment. Now the six regulators drafting the separate QRM rule, including the Department of Housing and Urban Development, the Office of the Comptroller of the Currency and the Securities and Exchange Commission, must decide whether to include such a requirement -- and whether to make it less than the 20 percent they originally proposed.
Down payment size “is the major credit-risk driver in mortgages that was untouched by the QM rule,” Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington, said in an interview.
Defining safe loans as those with a 10 percent down payment, instead of 20 percent, “is the politically expedient course to take,” Petrou said.
Others, including Republican Senator Johnny Isakson of Georgia, are calling for a down payment requirement as low as 5 percent and a continued role for private mortgage insurance to hold a share of the risk on loans with less than a 20 percent down payment.
Meanwhile, there are many unanswered questions about the impact of the rules already released, Stevens and other industry participants say. Bankers say they worry that the QM rule could prevent borrowers from obtaining so-called jumbo mortgages, which are larger than the $729,750 ceiling on FHA-eligible loans or the $625,000 ceiling on loans backed by Fannie Mae and Freddie Mac.
In addition, it’s unclear what will be included in the provision capping fees at 3 percent of the loan amount, and what will happen if mortgages originated in good faith are later found not to meet underwriting standards.
The CFPB yesterday also released 1,600 pages of regulations setting requirements for mortgage servicers, including new limits on foreclosures while borrowers are simultaneously negotiating loan modifications.
The regulations, which apply to servicers who handle at least 5,000 loans, also require clear mortgage bills that warn consumers before their interest rates adjust. The servicing rules and the QM rule are scheduled to go into effect in January 2014.
The servicing rules’ complexity could lead to unintended consequences that will need to be addressed as soon as possible, Stevens said.
“I’m concerned we’re going to force a second correction in the housing market by creating a regulatory clampdown on fully sustainable homeownership because too many people haven’t really dissected the deep nuances of these rules,” he said in an interview yesterday.
Mortgage credit is already tight. Borrowers whose loans closed in 2012 had an average credit score of 748, which would place them in the top 37 percent of Americans, according to Ellie Mae, a Pleasanton, California, company that provides software for the mortgage industry. Those buyers made down payments averaging 21 percent. The interest rate on a 30-year fixed-rate mortgage averaged 3.9 percent in 2012, Ellie Mae said.
Still to come from the CFPB are new rules governing loan officer compensation and regulations governing simplified loan documents.
International regulators are phasing in new capital standards mandated under the Basel III accord by 2019. Those will require banks to hold more capital against certain mortgages.
The full impact on lending will only become clear once all the rules come out, and the most restrictive rules will determine the scope of the market, said Tim Rood, a partner in Washington-based consulting firm Collingwood LLC.
“Particularly in an environment as heightened as this one, you’re going to regress to the lowest common denominator from the credit perspective,” he said. “Whichever of these standards is the most conservative is the one that you’re going to adhere to.”