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The Impact of New Mortgage Rules

According to a White Paper release issued by CoreLogic, new mortgage rules will play a critical role in building private investors’ confidence in the secondary market. However, not everyone shares the same sentiments towards the new policies. Scheduled to take effect early next year (January 10th), others are worried the change in direction could potentially cripple lending practices.

The White Paper report acknowledged that “setting the rules and boundaries for consumer mortgage loans is one of the first steps needed to encourage more private capital investment in the housing finance system.”

It continued to say that the “uncertainty of investor appetite for credit risk and litigation risk under the new rules persists, but the new rules provide a foundation to build investor trust in the system over time.”

The new mortgage rules, revealed to the public earlier this year, are directly correlated to the recent state of the housing sector. More specifically, they are to act as a preventative measure, making sure we do not experience a similar housing sector decline in the near future. The changes make a point to specifically address “ability to pay” and “qualified mortgage” rules.

According to the new verbiage, mortgage lenders will be required to ensure borrowers don’t take on more debt than they can afford. In doing so, prospective borrowers will be evaluated on a variety of factors, including: current income, assets, credit history, monthly mortgage payments and more.

The addition of the “qualified mortgage” rule will prevent excessive points and fees from being tacked onto upfront costs. Furthermore, under the new rule, borrowers may not have:

  • Risky loan features (terms that exceed 30 years)
  • Interest only payments that do not reduce the principal
  • Negative amortization payments where the principal increases
  • A balloon payment at the end of a loan term
  • A debt-to-income ration over 43%

For the time being, loans with a debt-to-income ratio above 43% will be considered qualified mortgages so long as they meet underwriting requirements of government-sponsored enterprises.

According to representatives of the Obama administration, returning private capital to the center of the housing finance system is a top priority. Next year’s new rules are, therefore, an attempt to make sure borrowers have the ability to pay their debts.

According to CoreLogic’s recent release, “the road map to a sound residential finance marketplace will rest on transparency, accountability and traceability. Validation of consumer data and documentation, including material changes prior to funding a mortgage loan, will lead to more confidence in the process.”

It remains to be seen how these new rules will impact lenders, but many are worried about compliance issues. New guidelines may be difficult for lenders and borrowers to navigate, making the process more demanding than it already is. However, CoreLogic is confident these concerns will resolve themselves through “common sense.”

The white paper states that “the markets will have confidence that the information and processes established to make a sound loan are likely to result in sound loan performance for the life of the loan.”

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