The Mortgage Bankers Association (MBA) recently announced that mortgage credit has become a bit less available, reversing a trend that had seen mortgage underwriting guidelines steadily loosening. The MBA noted that the decline in credit availability reflects lenders beginning to adjust to new Qualified Mortgage standards set earlier this year by the Consumer Financial Protection Bureau (CFPB). Since those standards are apparently here to stay, the question is: does the recent tightening of mortgage credit availability represent the beginning of a new trend?
While consumers who are in the market to buy a home or refinance a mortgage often closely follow developments in mortgage rates, they should also be aware of trends that affect what it takes to qualify for a home loan. While mortgage rates affect the price consumers pay for a loan, Qualified Mortgage standards could impact not only the price, but also what type of loans are available, what terms consumers have to accept, and whether or not certain consumers can qualify for a home loan.
Why Qualifying for a Mortgage Got Tougher
Why did qualifying for a mortgage just get tougher? The MBA points to Qualified Mortgage standards first introduced by the CFPB this past January and finalized in September. Those standards were introduced in an attempt to eliminate some of the lending practices that often led to foreclosures and thus helped precipitate the mortgage crisis.
The new CFPB Qualified Mortgage rules address the standards borrowers must meet and the type of loans that will be available. On the borrower side, the standards focus on making sure there is a reasonable likelihood of being able to repay the loan. In terms of the loans themselves, the CFPB is trying to restrict loans with features that often led to the debt being harder to repay than the consumer expected.
Overall, the principle behind the new CFPB standards is that if it is a little tougher to qualify for a home loan in the first place, and if there are more restrictions on the terms of those loans, then fewer foreclosures should result in the long run.
The Irony of Low Mortgage Rates
Of course, even before the CFPB standards were introduced, the mortgage industry had tightened up its underwriting standards in reaction to being burned by so many foreclosures. This was the paradox of record-low mortgage rates in recent years: while loans were cheaper than ever, they were also much harder to get.
To some extent, the affordability and the availability of mortgages have continued to go in opposite directions. It's understandable -- when mortgage interest rates are low, demand for loans increases. However, mortgage lenders can only process so many applications -- so they can afford to be picky about the loans they approve.
Figures from Freddie Mac show that in August, 30-year fixed mortgage rates finally began to level off after rising steadily in previous months. At the same time, the MBA report on mortgage credit availability identified August as the first month out of the last five in which home loans became tougher to obtain.
Not Bad News for Most
The good news is that most consumers shouldn't be affected by the type of credit tightening that the MBA is reporting. The MBA specifically identified interest-only mortgages and loans with terms exceeding 30 years as types of financing that are disappearing from the market in reaction to the new Qualified Mortgage standards.
While interest-only mortgages and loans with extra-long terms are useful in certain situations, the CFPB wanted to steer ordinary consumers away from these loans because they are types of mortgages that led some to take on more debt than they could handle. The structure of both these loans is designed to minimize monthly payments, at least initially, but the effect of this is to increase interest cost in the long run.
Fortunately, restrictions against interest-only loans and extra-long mortgages should have not directly affect on the average consumer interested in a conventional, 30-year mortgage. For now, those consumers who have good credit and sound finances should find those plain-vanilla types of loans readily available.
The Upside of Tougher Standards
In fact, consumers who aren't interested in more exotic mortgage products should have reason to cheer tighter restrictions. Think of the mortgage market as one large pot of money. The more of that money that goes to exotic mortgages - or to the losses suffered by those mortgages - the less is available for more commonplace mortgages.
By restricting some riskier home loans, what the CFPB hopes to do is make sure that more mainstream loans continue to remain readily available.