January 10, 2013

Tighter Underwriting Rules Set To Take Effect (In A Year)

Set to take effect on January 10, 2014: a new rule forcing lenders to verify borrowers' ability to repay mortgages by confirming their income and assets.

The rule, mandated by Congress in response to lax underwriting standards before the 2008 financial crisis, will also offer some legal protection for lenders who follow guidelines for so-called qualified mortgages, according to an e-mailed statement by the [U.S. Consumer Financial Protection Bureau]. The measure also insulates issuers of qualified mortgages at prime interest rates from future lawsuits.
For qualified mortgages, the borrower must have a debt-to-income ratio of 43 percent or less. Loans that do not meet that criterion but are eligible for purchase, guarantee or insurance by Fannie Mae or Freddie Mac, or are issued by some government agencies, will be considered qualified mortgages for as long as seven years.
Qualified mortgages must also limit points and fees to 3 percent of the total loan amount, according to the bureau. Features that proved highly risky during the housing bubble, such as negative amortization, interest-only payments and terms exceeding 30 years, [will also be] prohibited for qualified mortgages.

Emphasis added.

Lender Review of Borrowers Tightened Under Mortgage Rules [Bloomberg]

First Published: January 10, 2013 8:15 AM

Comments from "Plugged In" Readers

Looks like most of these rules were suggested back in August of 2006. Took a new government agency, 6.5 years, a finacial crisis and just common sense to put this together.

Posted by: Tool long enough at January 10, 2013 8:36 AM

this looks like a typical BS law - protects banks from litigation and does virtually nothing else. as far as limiting credit, right now EVERY lender on the planet is verifying income and ability to pay. and this law seems to say that if the lender doesn't conform to the letter of the law, the loan is still considered "qualified" for its first 7 years - when most people sell well within that time frame. here's a confirming quote from the businessinsider article

"“Our assessment of the broad contours of the rule leads us to believe that the rule is less constrictive on mortgage credit than once thought, which translates to increased ease and certainty in the mortgage origination process,” Isaac Boltansky, a policy analyst with Compass Point Research and Trading LLC"

in other words; nothing to see here - move along

Posted by: hangemhi at January 10, 2013 9:09 AM

hangemhi, the new rules are not intended to tighten the lending standards that are in practice today. They are supposed to prevent returning to the lax standards we had 5 years ago, which lead to the melt-down.

You'd think that banks would learn and know better next time, but we all know that's not how it works. That's why we need regulations.

Posted by: asiagoSF at January 10, 2013 9:41 AM

i haven't read the law, so maybe there are teeth in it, but the analyst sees no teeth, and per the article it appears that bad loans are still "qualified" for protection for 7 years. Besides, it is a simple matter of over turning any restrictive law if the banks lobby hard enough.... which of course they will do

Posted by: hangemhi at January 10, 2013 11:32 AM

I also haven't read the text of the law yet either but the Bloomberg article points out that the banks are pleased it offers them protection from being sued by borrowers for lending them too much money.

Has the world really come to this? Can I sue whole foods for selling me more food than I should eat?

I can understand the purchasers of mortgage backed bonds suing mortgage originators who misrepresent their underwriting but this is something else. And here I was innocently thinking that banks were reluctant to lend money for the old fashioned reason that they might not get it back.

This law appears to be a fix for even worse laws already out there...

Posted by: around1905 at January 10, 2013 3:20 PM

This is totally f*cked. How on earth are equity based loans supposed to work in he future? There are many people with a significant asset base that report low-ish incomes on their tax returns. These people are usually low risk borrowers, as their credit is often great and they have cash for a strong down payment. They are not corporate w-2 slaves and don't fit the myopic mold these idiot bank regulators seem to idolize as "safe bets." This closed minded thinking is really annoying. Idiots.

Posted by: 48yo hipster at January 11, 2013 9:21 AM

48yo hipster,

I guess it's the collateral damage of trying to correct the massive abuses from 2003-2007. There are so many ways people played with Other People's Money that something has to be done.

For instance, I have a contractor friend who did a no-doc I/O mortgage 10 years ago for a long-term construction project (not completed yet). He was pretty flush at the time and the bank took his stock portfolio as a collateral. Of course his non-diversified portfolio tanked in 2008 right at the time he had to do his first refi. He being in the construction business, his real income has crashed as well.

The bank asked him to document his income which he did by being creative with his tax returns. He paid taxes on non-existant income first with his savings, then with credit cards. The alternative is losing it all.

Hopefully the market will bail him out before he hits the wall. But the original sin was for the bank to consider a highly liquid person as a no-risk client.

The goal of a mortgage is to borrow against your future incomes. If you are liquid, you should play with your own chips first, before putting OPM at risk. That's what I am doing. I hate mortgages.

Posted by: lol at January 11, 2013 10:06 AM

"Has the world really come to this? Can I sue whole foods for selling me more food than I should eat?"

How about if whole foods sold you a brand new food that they said was healthy and had 1/3rd the calories of the regular version and that you could save a lot of money by buying it in bulk and that it would last for months. In fact whole foods even had a food chemist there to explain in very techinical terms how this was all possible. Then you get it home and after a two days it turns out it reduced calorie count info is wrong and it also spoils in 3 days? You also find out that whole foods was paying the food chemist a commission on all of this new wonder food that was sold. Is is wrong to think whole foods might have done something bad? Of course I'll laugh at you for being stupid enough to believe whole foods claims about this food and say you should have done your research and known more about what you were buying.

I do not really understand this line of thinking that lenders did nothing wrong by lending people more money then they could payback. Many financially unsophisticated people were exploited by hucksters to make a buck.

Posted by: Rillion at January 11, 2013 10:09 AM

48yo hipster - In addition to what lol described there's the problem of how the bank evaluates the risk of a borrower who's assets are tied up in real estate. At one end of the spectrum you could have several rentals that are solidly cash flow positive with mortgage payments that are manageable. At the other end you could be highly leveraged to the point that a little hiccup in the market could send the whole enterprise falling like a house of cards.

Yes, a thorough audit of the business could be used to determine the risk, but that becomes very labor intensive, complex, and ultimately subjective.

I don't know enough about banking to know whether this is possible but one solution would be to allow banks to issue such loans to creative borrowers so long as there is no government guarantee to backstop the loans if they go bad. In other words give the banks real incentive to execute proper due diligence.

Posted by: The Milkshake of Despair at January 11, 2013 11:02 AM

MoD,

Indeed checking facts is labor intensive. But we're talking about actual physical property changing hands and banks should do some actual ground work, like seeing the property to support an appraisal. Right now, they're simply sitting at their desks and pushing paper/data around, contracting much of the work to appraisers who also mostly sit at their desk and push data around.

After all, we're leaving many 10,000s or 100,000s on the table in mortgage costs and interest to banks who pay that borrowed money almost nothing. It's not only there to provide flush bonuses and cover risk, but to pay for actual work done.

Posted by: lol at January 11, 2013 11:38 AM

Lol/mod- in my case I'm not liquid, as my equity is in income producing real estate. And it's not difficult at all for banks to determine how solid those assets are: a good appraisal establishes the value of those properties based on recent comps as well as on a multiplier of the rental income value. And the mortgages on those properties are recorded, so equity is pretty straightforward to establish. (That's what hard money lenders do all the time.)

And don't kid yourselves, banks have magic little "red lines": they're not stupid, they know apartment bldgs in SF proper are a hell of a lot more stable in value than bldgs in, say Stockton. They take your location into account, discounting for various factors.

The problem was, banks didn't distinguish between people like me: very high credit, real cash for 25% down, low doc vs. bullish!t loans of: bad credit, no down, qualify on teaser loans AND no income verification. Those are two very different categories of borrowers, and that distinction is getting lost in the shuffle (with the much smaller of those two populations getting zero regard.)

Posted by: 48yo hipster at January 11, 2013 4:23 PM

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