The CFPB (Consumer Financial Protection Bureau) is formally releasing its new rules to implement the portion of the 2010 Todd Frank financial regulation overhaul pertaining to making lenders liable for determining that a borrower is able to repay the loan. There has been much discussion as to whether this will result in further tightening of credit which the CFBP and Congress would like to avoid. The rules are expected to cause lenders to limit the types of Mortgage Loans they offer. Full Documentation 30 year mortgages will likely be the primary lending format. Adjustable Rate Mortgages (ARM) will still be allowed but the borrower will need to qualify under the highest rate possible under the first five years of the loan. Of the two methods for banks to establish the borrower can repay the loan the borrowers total debt payment cannot exceed 43% of their pretax income. The second method is for the borrower to qualify under what is commonly called “desktop underwriting” which is a computer program written by Fanny May. The desktop underwriting option is temporary depending on how long Fanny Mae is with us or seven years whichever is shortest.
In the CFPB’s analysis 75% of loans in 2011 met the 43% debt to income criteria and one fifth of the loans that didn’t meet the 43% debt to income requirement could pass the desktop underwriting standard. That still leaves 20% of the loans issued in 2011 as not meeting the new rules. Not many people would say 2011 was a banner year for lending or a period of easy credit and if we approve 20% fewer mortgage loans under these rules that would be a significant “tightening of credit“. These new rules do not take into effect until January of next year. The bottom line is if you want a home and you qualify for a loan today go ahead and buy. It won’t be getting any easier to qualify for a loan when the new rules take effect. If you are a small business owner and waiting for Stated Income Mortgage Loans to return, it is probably time to start looking at the income you report on your taxes so you can show that you meet the 43% criteria.
For additional information see the Wall Street Journal article, Rules Set for Home Lenders, January 10th, 2013 by Nick Timiraos and Alan Zibel WSJ online .