We have gone through a wild ride in the roller coaster of the mortgage industry; from truly qualifying for a loan, to being handed one for walking through the door. I say Wall Street is to blame but that’s another story. Following the financial crisis over the last few years some much needed regulation was needed. The Dodd-Frank financial reform Act signed into federal law by President Obama on July 21, 2010 and was meant to be such reform.
The federal Consumer Financial Protection Bureau, or CFPB took over consumer protection oversight from the Fed in 2011 after lawmakers criticized the Fed for not doing enough to regulate the subprime mortgage market. Dodd-Frank tasked the CFPB with providing lenders with easy-to-identify criteria for a “qualified” mortgage that would satisfy the new ability-to-repay mandate. Until now though we had no clear definition of what a “qualified” mortgage consists of.
The CFPB has rolled out new rules that reshape the U.S. mortgage industry, and are designed to ensure that lenders don’t return to the lax standards that fueled the housing market’s boom and bust.
The rules implement what seems to be a logical proposition—that lenders consider borrowers’ ability to repay the loans they are given. But given the complexity of the issue, it took months of work for the CFPB to arrive at a definition of a “qualified mortgage” that would meet standards spelled out in the Dodd-Frank financial law of 2010.
The CFPB decided that lenders could satisfy this requirement in two ways: by making loans where the borrower is spending up to 43% of their income on total debt payments including the mortgage as well as credit cards, car loans etc, or by satisfying the computerized lending standards of Fannie Mae, Freddie Mac and the Federal Housing Administration which I’m sure will be updated to include the newly established debt to income ratio.
Overall, the rule is a big change from last spring, when there were widespread fears in the real estate world that the rule would seriously impact the availability of loans. The rule is far less onerous than what banks expected just six months ago. At the core of the rule lies a common-sense business principle: If a borrower can’t afford to pay back the loan in full, the lender has no business making that loan in the first place.
I think the media is to blame for consistently saying that lending is too tight and mortgage loans are hard to get. Truly, mortgage loans are not hard to get if you qualify to repay them. I will admit that loans today are more difficult to document with lenders requiring a paper trail on almost everything, but with everything online I think it’s actually easier to find a document today rather than a few years ago when you had to find it in a box somewhere then make copies.
With the Government backing about 90% of all loans today in one way or another through USDA, VA, FHA, and Fannie Mae and Freddie Mac there had to be a simple solution. It’s either this of the Banks can go back to lending their own money, which we all know isn’t going to happen any time soon.