Strict, new mortgage lending rules that aim to put an end to the worst home loan abuses of the past, aren’t expected to significantly impact Connecticut’s residential real estate market in 2014, experts say.
But the new rules, which are designed to take a back to basics approach to mortgage lending and lower the risk of defaults and foreclosures, are creating more paperwork for mortgage lenders, as borrowers are being asked to show more evidence of their ability to make good on a loan.
That, realtors and lenders say, could prolong the loan approval process, causing homeowners and sellers more headaches.
“There is a lot more documentation required,” said Catie Allen, branch manager and loan officer at West Hartford mortgage broker Mortgage Giver.
Mortgage lenders are being asked to comply with two new requirements: The Ability to Repay rule and Qualified Mortgages.
Here’s how they work:
Ability to Repay
• Lenders must determine that a borrower has the income and assets to afford to make payments throughout the life of the loan. To do so, the lender may look at an individual’s debt-to-income ratio, including the highest mortgage payments they would be required to make under the terms of the loan.
• In an effort to put an end to no- or low-doc loans, where lenders issue risky mortgages without the necessary financial information, lenders are now required to document and verify an applicant’s income, assets, credit history and debt. For borrowers, that means more paperwork and longer processing times.
• Underwriters must also approve mortgages based on the maximum monthly charges a borrower faces, not just low teaser rates that last only a matter of months, or a year or two, before resetting higher.
Qualified Mortgages
• To make sure borrowers don’t take on more house than they can afford, a debt-to-income ratio generally must be below 43 percent. This rule is not absolute. Banks can still make loans to people with debt-to-income ratios that are greater than that if other factors, such as a high level of assets, justify the risk.
• Qualified mortgages cannot include risky features, such as terms longer than 30 years, interest-only payments or minimum payments that don’t keep up with interest so a mortgage balance grows. That is forcing some lenders to change or modify their suite of loan products.
• Upfront fees and charges cannot add up to more than 3 percent of the mortgage balance. That includes title insurance, origination fees and points paid to lower mortgage interest rates.
The rules also restrict “steering,” or practices that give financial incentives to loan officers or mortgage brokers for pushing people into higher-interest loans that they can’t afford.
Despite the reams of new paperwork and oversight requirements, lenders don’t seem to be too worried about the new rules right now, according to Keith Gumbinger of HSH.com, a mortgage information provider.
“It’s no surprise; everybody has been preparing for the change for months,” he said. “Because there will be additional underwriting scrutiny, it could gum up the works initially and slow loan processing, but it’s really just the codification of things that are already in place.”
Allen said the new rules haven’t created any significant mortgage processing delays so far for her West Hartford brokerage, mainly because they’ve taken a proactive approach educating consumers about the new requirements. They, for example, created a loan application checklist for borrowers so they know exactly what documents are needed to demonstrate an ability to repay the loan.
That helps cut down the mortgage approval process, which typically takes 30-45 days, Allen said. Some lenders feared the new rules would extend the process to two months, holding up and/or potentially blocking home sales.
“Everybody was worried about how the new rules would impact the industry,” Allen said. “We haven’t seen much of a negative impact yet.”
West Hartford relator Lou Mira said he doesn’t think Greater Hartford home sales, which climbed 11.5 percent in 2013, will be significantly impacted by the new rules. “It may slow some deals down, but I haven’t seen any issues yet,” he said. “The key is making sure borrowers are prepared to provide the documentation upfront.”
One significant factor that shouldn’t disturb home sales, experts say, is what’s not in the rules. There’s no minimum down payment or credit score requirement.
“[The qualified mortgage] is not taking a one-size-fits-all approach. It ensures that first time homebuyers can still come to the table,” said Gary Kalman, policy director for the Center for Responsible Lending.
If the rules required a minimum down payment of, say 10 percent or 20 percent, it would eliminate many first time buyers who would have a difficult time raising that much cash.
The lack of a credit score requirement will enable lenders to loosen currently tight underwriting standards in the future should conditions warrant, according to Gumbinger. For the moment, most loans will still have to be backed by Fannie Mae and Freddie Mac, and, with a few exceptions, they won’t approve applicants with scores below 620.
HBJ Editor Greg Bordonaro contributed to this report.
