If the years leading up to the U.S. housing bust were rife with lax underwriting, the opposite problem has occurred in its aftermath: Excessively tight credit is making it impossible for many borrowers to obtain mortgages.
Enter the Consumer Financial Protection Bureau, which this week unveiled a much-awaited rule intended to strengthen mortgage standards and provide more legal protection to lenders. In requiring that lenders verify the ability of borrowers to repay their loans, the CFPB aims to safeguard consumers against deceptive practices and provide legal protection to banks, which have been wary of lending, fearful that borrowers would eventually default and sue.
The CFPB’s qualified-mortgage rule, which goes into effect next year and was required under the 2010 Dodd-Frank Act, gets many things right: It requires lenders to consider specific factors in determining whether a borrower can repay a loan, including income, overall debt, employment status and credit history. Borrowers’ total debt payments — including car loans, school loans and mortgages — can’t exceed 43 percent of their pretax income.
The rule prohibits many of the exotic loan features, such as interest-only payments, that fed the housing bubble. It also smartly avoids being overly prescriptive. It doesn’t, for example, require a certain level of down payment, which could wind up denying credit to otherwise-qualified borrowers.
Yet the CFPB’s rule alone won’t open the lending spigot. Other pieces must fall into place, including finalizing — and harmonizing — a rule detailing which types of mortgages will be exempt from a requirement that lenders retain a 5 percent financial stake in loans that are packaged into securities and sold.
Capital levels for banks must also be firmed up so companies can determine how much they can safely lend. Most important, the U.S. must outline its plans for Fannie Mae and Freddie Mac, which own or guarantee about 84 percent of mortgages, including whether the U.S. will continue to offer a mortgage guarantee at all.
The latter question is crucial given the CFPB’s new rule, which will probably lead to fewer types of loans and a heavier reliance on the 30-year fixed-rate mortgage. That product, largely unique to the U.S., has traditionally come with a government guarantee.
The CFPB’s rule, intended to set the industry standard for mortgages, gives huge deference to Fannie Mae (FNMA) and Freddie Mac. For example, it grants legal protection to loans that don’t meet the 43 percent debt-to-income test if they satisfy the underwriting standards of Fannie Mae, Freddie Mac (FMCC) and the Federal Housing Administration. The CFPB said this bypass, which could last as long as seven years, was necessary given the “fragile state of the mortgage market.”
As we’ve said, the time has come for a serious overhaul of housing finance, including limiting the government guarantee and adequately pricing it to reflect risk. Fannie Mae and Freddie Mac are profitable again and have stopped drawing on the Treasury. Housing prices are rising and foreclosures are beginning to stabilize.
If the roles of Fannie and Freddie aren’t soon clarified, the companies could become permanent wards of the state. Even Fannie Mae’s chief executive officer, Timothy Mayopoulos, said at a Bloomberg Government breakfast that the company’s mortgage dominance has reached an unhealthy and unsustainable level.
To bring back private capital, lenders need to know what constitutes a qualified residential mortgage and is thus free from risk-retention requirements, also known as the “skin in the game” rule. The rule, which six federal agencies are writing, is supposed to largely mirror the CFPB’s, yet a proposal last year differed in many ways, including imposing a 20 percent down- payment requirement.
The Federal Reserve and other agencies have rightly waited to finalize their rule until the CFPB completed its work, and they should now move quickly to synchronize.
Consumers deserve access to quality mortgages they can afford. The U.S. economy still suffers from the consequences of lax underwriting standards, yet the pendulum has swung too far the other way.
The CFPB’s rules strike the right balance between responsible lending and mortgage availability. Yet truly strengthening the housing market will require more effort by regulators and lawmakers.
To contact the Bloomberg View editorial board: email@example.com.
Katonah 2012 sales up 48% – Prices down 12% | RobReportBlog
Katonah NY Sales 2012 2011 64 Sales 43 48.83% UP $661,500.00 Median Price $753,500.00 12.20% DOWN $365,000.00 Low Price $333,500.00 $4,000,000.00 High Price $3,600,000.00 2721 Ave. Size 3052 $303.00 Ave. Price/foot $289.00 196 Ave. DOM 178 95.17% Ave. Sold/Ask 93.51% $846,804.00 Ave. Sold Price $919,470.00
Westchester & Putnam Market Highlights
– Housing prices remain stable
– Sales up sharply as many anticipated higher taxes relating to the Fiscal Cliff in 2013.
– Listing inventory continued to fall. Higher sales and tight credit ARE keeping inventory low.
– Days on market edged higher as older inventory continued to be absorbed.
– Luxury prices continued to outpace the overall market.
Key Trend Metrics (compared to same year ago period)– Average sales price increased 11.5% to $585,232.
– Number of sales increased 26.3% to 1,762.
– Listing inventory fell 13.2% to 4,759 units.
– Days on market was 201 days, up 3.6%
– Listing discount was 12%, down from 12.8%.– Monthly absorption rate was 8.1 months, down from 11.8 months.
By Property Type
Single Family Market
– Median sales price was $545,000, up 3.8%.
– Number of sales increased 31.1% to 1,042.
2-4 Family Market
– Median sales price was $359,125, up 4.2%.
– Number of sales fell 15.2% to 84.
– Median sales price was $145,000, down 1.4%.
– Number of sales increased 15.9% to 343.
– Median sales price was $320,000, down 5.9%.
– Number of sales increased 42.9% to 293.
Luxury Market (The Top 10% of all Single Family Home Sales)
– Median sales price was $2,150,000, up 21.6%.
– Luxury market begins from $1,450,000.
‘Although rental prices continue to rise, we are seeing the pace begin to slow as record low mortgage rates pull more consumers from the rental market into the purchase market. Rents in the luxury rental market continued to outpace the overall market and the number of new rentals continued to rise. Listing inventory is low and the vacancy rate is still falling. We anticipate rents to remain high throughout the year as tight mortgage underwriting and an improving regional economy will keep the pressure on.’
Westchester housing prices continued to show stability in the final quarter of 2012 as they have for most of the year. Luxury market prices continued to outperform the overall market. As mortgage rates fell to record lows, there was a jump in the number of sales and a large decline in listing inventory from the same period a year ago. We continue to be encouraged by the stability of the market and look to see more improvement over the year to come.
The rules, being laid out by the Consumer Financial Protection Bureau and taking effect next January, will also set some limits on interest-only packages or negative-amortization loans, where the balance due grows over time. Banks can make such loans, but the new rules would not protect them from potential borrower lawsuits if they do so.
And mortgage originators will in most cases be restricted from charging excessive upfront points and fees, from making loans with balloon payments and from making loans that load a borrower with total payments exceeding 43 percent of income.
With the sweeping rules, financial regulators are trying to substantially overhaul the market for home mortgages by creating a legal distinction between “qualified” loans that follow the new rules and are immune from legal action, and “unqualified” mortgages that continue practices that regulators have frowned on. The new rules are also aimed at getting banks to lend again, something they have been slow to do since the financial crisis and since the Dodd-Frank Act required new limits on bank activities.
Gone, the regulators hope, will be the unbridled frenzy that encouraged lenders to ignore whether borrowers could repay as long as the lenders could sell the mortgages to third parties, usually investment firms that sliced them up and resold them as part of complex financial derivatives.
By following the new rules, banks will be given a “safe harbor,” which ensures that they cannot be successfully sued for reckless or abusive lending practices, federal officials said Wednesday. Lenders must document a borrower’s ability to repay a loan; one way of doing that is to follow several guidelines issued Thursday that make a loan a “qualified” mortgage.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said Richard Cordray, the director of the consumer bureau. “Our ability-to-repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”
Mortgage bankers generally applauded the new regulations, saying that they clear up uncertainty that has hung over the home lending business since the financial crisis. In fact, most of the types of loans now being restricted, which were rampant during the inflation of the housing bubble, have been relatively rare in the last couple of years because many banks have tightened lending since the financial crisis.
“These rules offer protection for consumers and a clear, safe environment for banks to do business,” David Stevens, chief executive of the Mortgage Bankers Association, said in an interview. “Now everybody knows if you stay inside these lines, you are safe.”
He added that he believed the consumer bureau “did a great job listening to stakeholders” in shaping the rule.
The new rules will not necessarily lead to an immediate expansion of credit, Mr. Stevens said, because nearly all mortgage loans being made currently are being sold to government-sponsored enterprises like Fannie Mae and Freddie Mac. Their underwriting standards are not affected by the new rules.
In certain circumstances, the new lending rules can be bypassed for up to seven years, regulators said. New loans can be considered to be a “qualified loan” even if the borrower has a debt-to-income ratio of more than 43 percent as long as the loan is eligible for purchase or guaranteed by Fannie Mae or Freddie Mac, for example, or by one of several executive branch agencies, like the Department of Veterans Affairs.
The consumer bureau said that the exception was created “in light of the fragile state of the mortgage market as a result of the recent mortgage crisis.” Without the exception, the bureau said, “creditors might be reluctant to make loans that are not qualified mortgages, even if they are responsibly underwritten.”
Similarly, the new rules allow balloon payments in mortgages that are originated by and retained in the portfolio of small lenders that operate primarily in rural or underserved areas.
The legal protections offered to lenders by the qualified mortgage rule are not absolute. Lenders do not receive complete immunity from lawsuits in all circumstances. Some higher-priced loans, given to consumers with weak credit, can be challenged if the borrower can prove that he did not have sufficient income to pay the mortgage and other living expenses. And the rules do not affect the rights of consumers to challenge a lender for violating other federal consumer protection laws.
“We believe this rule does exactly what it is supposed to do,” Mr. Cordray said in a statement prepared for delivery Thursday morning in Baltimore, where the rules are being announced. “It protects consumers and helps strengthen the housing market by rooting out reckless and unsustainable lending, while enabling safer lending,” he said.
This article has been revised to reflect the following correction:
Correction: January 10, 2013
An earlier version of this article incorrectly said that the new rules restrict mortgage originators from from making loans that load a borrower with total debt exceeding 43 percent of income. The restriction is on making loans that load a borrower with total payments exceeding 43 percent of income.
NEW YORK (CNNMoney)
Federal officials unveiled new mortgage rules on Thursday meant to reduce risky lending and make it easier for borrowers to know exactly what they are getting into.
The aim of one rule is to keep lenders from issuing loans to borrowers who can’t afford to pay them off.
“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said Richard Cordray, director of the Consumer Financial Protection Bureau.
During the housing bubble, many lenders had lax underwriting standards. Banks often didn’t check documentation, didn’t require minimum credit scores and didn’t determine whether borrowers had income enough to keep up payments.
Now, when a loan meets new lending criteria outlined by the CFPB, it becomes a “qualified mortgage,” which will give protection for the banks from lawsuits filed by aggrieved borrowers or buyers of mortgage-backed bonds.
“It’s a set of standards that protects consumers from bad loans but it also protects lenders from lawsuits,” said Davis Stevens, CEO of the Mortgage Bankers Association. “Lenders are not protected if they go outside the guidelines.”
The new rules will eventually change the process homebuyers go through in obtaining mortgages. Here’s what you need to know.
Which lenders do the rules cover? All companies that give out mortgages will be governed by the new rules — big national banks, savings and loans, community banks and credit unions.
“The rules will encompass most of the market as it exists today,” said William Emerson, president of QuickenLoans.
How is a “qualified mortgage” defined? The rules spell out what is called a qualified mortgage. To judge whether a loan is qualified, lenders must consider these factors:
- Income and assets must be sufficient to repay the loan;
- Borrowers must document their jobs;
- Credit scores must meet minimum standards;
- Monthly payments must be affordable;
- Borrowers must be able to afford other debts associated with the property such as home equity loans;
- Borrowers must be able to afford all home-related expenses such as property taxes; and
- Lenders must consider a borrower’s other obligations like student loans, car loans and credit cards.
What if a borrower doesn’t meet all those guidelines? A homebuyer could still get a mortgage, but only if the mortgage payments don’t exceed 43% of the borrower’s pre-tax income.
What other requirements are there? When judging ability to repay, lenders can’t use payments based on interest-only loans or so-called negative-amortization rates, in which mortgage balances grow over time.
They also can’t use teaser rates, which adjust higher after a set term. Loan terms cannot exceed 30 years, and up-front fees, such as points paid to reduce interest rates, must not be excessive.
To be clear: The rules don’t prohibit those unconventional types of loans. But lenders, in deciding whether to give out such a loan, must judge a borrower’s ability to repay as if the loan were a conventional loan.
When will the rules go into effect? The rules start to kick in by January 21, but lenders will have 12 months to fully implement them.
What about jumbo loans? The ability -to-repay rule covers even the large, so-called jumbo loans, which are not backed by any government agencies such as Fannie Mae or Freddie Mac. But Stevens of the mortgage bankers group said he still expects jumbo lenders to follow the qualified mortgage guidelines. That will give them legal protection.
Are there any exceptions? People with subprime adjustable-rate mortgages or other risky loans who are refinancing can do so without going through the full underwriting process required by the new rules.
The CFPB is also proposing that mortgages issued by certain non-profits for low-income homebuyers be exempt from the rules. The agency also wants to make exceptions for some refinacings made through the Home Affordable Modification Program and for some loans issued by small community lenders. These proposals, if approved, will be finalized this spring.
First Published: January 10, 2013: 1:47 AM ET