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New Mortgage Rules Will Have a Significant Impact in 2014

Published on Thursday - December 05, 2013

The upcoming transition into 2014 has been met with both eager anticipation and trepidation. While the housing sector appears to be on a sustainable path to recovery, uncertainty is still prevalent. The real estate industry is expected to undergo several changes that will undoubtedly resonate on a national level. The implementation of new mortgage rules are coming at a challenging time, but are expected to have a significant impact on the foreseeable future of the housing sector. Small banks and prospective buyers may find it difficult to comply with the new set of mortgage regulations expected to start early next year.

One of the most prominent changes will occur on January 10th. No more than two weeks into the new year, banks will be required by the Dodd Frank law to ensure that monthly mortgage payments are affordable to respective buyers. Tougher regulations will be enacted to reduce the amount of homeowners that can potentially default on their loan. However, the changes may make it difficult for small banks to compete. The new rules designed to make mortgages safer may actually result in less choices for borrowers.

Small banks may be relegated to the side because of the cost of tougher regulations. “My concern is that we’re going to be in an environment where some lenders are too small to comply,” said David Stevens, CEO of the Mortgage Bankers Association.

New mortgage regulations may be attributed to the frivolous lending practices witnessed during the housing bubble. At the time, it was not uncommon for some banks to issue a loan without checking applicants’ income or assets. The new rules, however, will be much stricter.

Starting January 10th, lenders must meticulously research the financial standings of each applicant to determine whether or not they have the ability to repay the loan. This means that banks can’t lend to anyone whose total debt payments would exceed 43 percent of their income. In order to follow through with their plan, banks will be required to carefully inspect pay statements, bank records, tax returns, and other relevant paperwork.

Anthony Hsieh, the CEO of LoanDepot, notes that banks will have to update their underwriting policies and procedures, change their technology and retrain their staff. Staying up to date with new mortgage regulations requires a lot of effort on the bank’s behalf. Not only are lenders expected to increase expenses; they must do so in accordance with the new regulations. This means that the quality of the loan programs must meet compliance standards.

Banks large and small are hiring outside companies to handle a share of their mortgage underwriting to ensure the quality, according to Jeff Taylor, co-founder of Digital Risk, a provider of risk, compliance and transaction management services.

While this is a relatively small issue for larger banks, those of a smaller nature will find it increasingly difficult to keep up with the financial demands that accompany the new regulations. Subsequently, those that can’t comply will be forced out of the market. A significant reduction in smaller banks will ultimately reduce options made available to prospective homeowners seeking a loan.

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