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Lenders Opting To Operate Outside Of New Mortgage Rules

Written by Than Merrill

Effective January 10, new mortgage rules will serve as a means to protect borrowers and lenders from repeating the transgressions of the previous housing crisis. Should lenders adopt these rules, they will be protected from legal recourse in the event a loan is not paid off. The rules, however, are not mandatory. While many lenders are expected to comply, there are those who intend to cater to wealthy borrowers. As a result, prospective buyers looking to acquire a jumbo mortgage may see favorable changes in loan practices.

In accordance with the Dodd-Frank financial reform legislation, lenders are required to provide documentation that any borrower is fully capable of paying off their mortgage. This is a significant contrast to practices that initiated the recent housing crisis and should prevent a repeat for the foreseeable future. Complying with new rules established by the Consumer Financial Protection Bureau will confirm that lenders are preforming their due diligence and making sure borrowers are able to pay off their debt.

According to CNBC, “the rules allow for adjustable-rate loans, but they have to be underwritten to the highest possible adjustment payment. Loans can have no high fees, no interest-only features, and, perhaps the biggest hurdle, a debt-to-income ratio no greater than 43 percent.” In the event that a borrower meets these criteria, their respective loan is deemed qualified. Subsequently, lenders are protected from any legal actions that may result form a default.

While the majority of loans today are deemed qualified, borrowers are faced with tougher underwriting practices. Many have been subjected to rising interest rates, essentially forcing them to take out an adjustable-rate loan. While these will have a lower monthly payment, they are much harder to get.

The size of the average mortgage applied for today is the largest in history, at nearly $270,000, according to the Mortgage Bankers Association. This will ultimately make it much more difficult for borrowers to fulfill the debt-to income ratio requirements set forth in the mew mortgage rules.

“The buyers that are out there are much more affluent. They have much larger home savings and home equity saved up, and they’re looking for a larger type of house,” Buck Horne, an analyst at Raymond James, said on “Squawk on the Street” “The first time buyer, unfortunately, remains pretty well locked out of the market.”

With the average borrower facing tougher obstacles, lenders opting to operate outside of the new rules will focus their attention on affluent individuals.

“We are going to offer over 43 percent, but the difference is we’re going to want to make sure there is enough residual income that somebody does have the ability to repay,” said Karen Mayfield, a senior vice president at Bank of the West. “Those people who are self-employed or who do have substantial income, there will be ways to justify allowing over 43 percent debt-to-income.”

The mortgage industry was quick to reject the upcoming rules, claiming no one could operate outside them. However, as the date approaches, more are now saying they will operate outside the rules to cater to a broader audience. Wells Fargo said it would do non-qualified mortgage loans and keep them on their books.

“It looks like a nice niche from a lenders perspective because you’re not going to have as much competition. Certainly you’re going to have much more regulatory risk,” said Guy Cecala of Inside Mortgage Finance. “The risk of operating outside the QM box is that a borrower can dispute, and basically win, if you try to foreclose if there’s a problem down the road.”