January 7th, 2014 4:22 PM by Robin Bain
WASHINGTON – Jan. 7, 2014 – If you get a mortgage this year, be prepared for some changes.On Friday, the federal government’s new “ability-to-repay” and “qualified mortgage” rules take effect, or ATR and QM for short. The ATR rules detail how your lender must document your income, expenses and assets.The QM rules limit the kind of mortgage your lender can issue you if it wants to sell your loan on the secondary market, as is done with the vast majority of such loans.The QM rules prohibit features such as low teaser rates that reset upward. A mortgage can’t raise a borrower’s debt-to-income ratio above 43 percent, and points and fees can’t exceed 3 percent of the total loan.“Ultimately, the benefit will be with the consumer,” said Mike Julian, an agent with RE/MAX Associates of Lancaster and former president of the Lancaster County Association of Realtors.That said, mortgage professionals have some complaints about the regulations.The new rules will give lenders less leeway to deal with borrowers’ unique circumstances, making it harder for some people to qualify for mortgages, they said.They will make it harder to do settlements quickly.And they will ensure that mortgage lending remains the exhaustive, intrusive process it has become.Many borrowers already are taken aback at how deeply banks have to pry into their financial lives, said Jill Carson, president and chief operating officer of Fulton Mortgage Co., a division of Lancaster-based Fulton Bank. Consumers don’t always realize lenders are just doing what regulators require, she said.“They don’t understand why we’re asking all the questions we’re asking,” she said.The purpose, of course, is to avoid the kind of lending that helped make the 2008 financial crash so devastating.“Reason and sound judgment were absent when many banks and other mortgage businesses lent to consumers without even considering whether they could pay back the money,” Consumer Financial Protection Bureau (CFPB) Director Richard Cordray told the Consumer Federation of America late last year. “The supposedly rational market had become wildly irrational.”Former Floridian Peter Castor found out first-hand how even responsible homeowners can lose out in a distorted market. In 2007, he and his wife bought a house in the Tampa area. Home prices had begun to slip, but people didn’t think they would keep going down, he said.They were wrong. Florida was at the end of a huge housing bubble.In 2010, the Castors moved to the Lancaster area so Peter could become director of marketing at Lancaster Bible College. They had to sell their Tampa house. Florida’s real estate market was a shambles, and they took a huge loss.“When life circumstances require you to sell, … you take what you can get,” he said. “When the bubble burst, it hurt everybody.”Cordray and others say bubbles like Florida’s arose from lax lending standards, “toxic” mortgage features and outright fraud.QM and ATR rules aim to keep the market honest.Said Tom Gillen, president of Susquehanna Bank’s mortgage division: “It’s good to have rules that level the playing field for everyone.”Fannie Mae, Freddie Mac and federal housing agencies’ mortgage standards are somewhat different; those mortgages, too, will count as qualified mortgages for the time being.The ATR and QM rules have been written for borrowers with stable full-time jobs and more or less straightforward financial circumstances, said Jim Deitch, co-founder of local mortgage consulting firm TeraVerde Management Associates and former chairman and CEO of American Home Bank, based in Mountville. They don’t work as well for people with multiple jobs, income that varies, or other unique circumstances, he said.And lenders are sharply constrained in how they handle such situations.“The calculations have largely removed underwriter judgment,” Deitch said.For people without typical American consumer debts, such as the Amish, a mortgage greater than 43 percent of their income might be perfectly affordable, even though it falls outside QM standards, Carson said.The regulators’ viewpoint is essentially that “they know better than the borrower,” she said.CFPB Director Cordray and bureau representatives stress that the bureau isn’t stopping banks from making non-QM loans. They just have to keep them in their portfolio.The problem with that, Deitch said, is liability. Lenders that issue QM loans get very strong protections against being sued afterward. The protections for non-QM loans are weaker. Many lenders don’t want to deal with the added risk.Nevertheless, predictions that non-QM loans would disappear appear to be premature. Some of the nation’s largest banks, including Wells Fargo and Bank of America, have said they will issue non-QM loans.So have Susquehanna Bank and Fulton Bank, Gillen and Carson said. Both banks plan to keep their non-QM mortgages small in number and intend to proceed carefully, they said.Meanwhile, for real estate professionals like Julian, the new rules mean less last-minute flexibility. Disclosures showing all financial details must be provided to mortgage borrowers three full days before settlement, up from one day, Julian said. If there is any change, the disclosures must be revised and the clock starts again.It may be harder to do a settlement in 30 days, at least at first, he said. A 45-day time frame should be doable for most mortgages.Brokers are concerned about the 3 percent cap on fees. Some of the details on how to apply the fee rules remain unclear, said Vic Kicera, president of Lancaster Mortgage Co., an independent mortgage correspondent lender based.The caps make it harder for brokers to compete with banks, said Bryan Stahl, president of Fidelis Mortgage Corp.That could reduce options for consumers who want to “shop rates hard,” he said. “This does not benefit the customer.”Overall, the industry remains apprehensive about the QM and ATR rules’ potential for unintended consequences, Deitch said. “An already fragile real estate market does not need further pullbacks.”As for Castor, the former Floridian, he said his family recently bought a house in Willow Street. Getting a mortgage was an intensive process, he said, but his four previous home purchases were no different. He doesn’t have a problem with lenders doing their homework.“It seems fair,” he said. “I don’t think I expected less.”It’s important to understand what Consumer Financial Protection Bureau’s new mortgage rules don’t affect, as well as what they do, according to bureau Director Richard Cordray.In his speech to the Consumer Federation of America late last year, Cordray referred to several “myths” about the CFPB’s new mortgage rules. The facts are as follows, Cordray said:• The rules don’t affect current mortgages, only those issued on or after Jan. 10.• The rules don’t say anything about downpayments. Those are left “entirely up to you and your lender,” Cordray said.• The rules don’t stop lenders from extending loans that exceed a debt-to-income ratio of 43 percent, Cordray said. Lenders can use the alternative standards for mortgages backed by Fannie Mae, Freddie Mae and federal housing agencies, or they can keep mortgages on their own books.In short, “lenders can simply use their own judgment when looking at your ability to repay, just as they always have done,” Cordray said.Qualified mortgage rules• “Toxic” features, such as interest-only periods and negative amortization, are prohibited.• The loan period cannot exceed 30 years.• Balloon payments are prohibited in most cases.• In general, consumers’ monthly debt-to-income ratio may not exceed 43 percent.• Points and fees are limited to 3 percent of the total loan amount for loans of $100,000 and more.• Lenders receive protections from lawsuits related to qualified mortgages, even if the loans default.