Will New Mortgage Rules Help or Hurt the Market?

As new mortgage rules come closer to implementation, some industry professionals are sounding dire warnings about how they could impact the housing market. Are these legitimate concerns, or are some mortgage practitioners just crying wolf?

Yes. And No

It's probably a bit of both. New regulations can be disruptive when first implemented, and may have unforeseen consequences. However, that doesn't mean they aren't worth the trouble in the long run.

At issue here are the Consumer Financial Protection Bureau's new Qualified Mortgage standards, due to go into effect on January 10, 2014. These standards prescribe what conditions a mortgage has to meet to be eligible for later sale to a government-sponsored entity (GSE) such as Freddie Mac or Fannie Mae. That eligibility for GSE purchase is an important consideration for mortgage lenders in making loans in the first place -- having a ready market for their existing loans helps lenders reduce their risk and make capital available for subsequent loans.

The Qualified Mortgage standards focus heavily on two areas: limiting loan costs, and establishing the borrower's ability to repay. Naturally, from a borrower's standpoint, those sound like worthy areas of concern, but lenders caution that anything that makes it more difficult for them to make loans means it will be more difficult for consumers to obtain loans.

Good, Bad....and Stable

In other words, there are trade-offs to the new regulations, so here is a look at some of the possible ramifications, both good and bad:

  1. The new rules could lower customer costs. The new rules decree that combined points and fees on a Qualified Mortgage cannot exceed three percent of the loan amount. Since lenders generally want the flexibility to resell their loans, and since GSE's provide the greatest opportunity to do that, lenders will have an incentive to keep points and fees below that three percent threshold.
  2. Lower costs could mean tighter availability. The flip-side of those tighter cost controls is that it might mean mortgages are harder to obtain. An audit by ComplianceEase, a firm that provides compliance software to mortgage lenders, found that one in five mortgages currently being written would not meet the upcoming Qualified Mortgage standards -- often because the fees and points are over the limit. In some cases, lenders may simply lower their fees and points after the new guidelines go into effect, but in other cases they may simply choose not to make some of the more borderline loans they could have made. Between this and the increased emphasis on establishing the borrower's ability to repay, expect it to be tougher for consumers to get home loans with bad credit.
  3. Squeezing mortgage volume could hold down housing prices. Low mortgage rates have helped engineer a housing recovery, but tighter loan standards combined with higher mortgage rates could snuff out that recovery. In this regard, the Qualified Mortgage standards don't just matter to future home buyers. If they suppress home prices by keeping would-be buyers out of the market, those standards could adversely impact current homeowners who want to refinance a mortgage or take out a home equity loan.
  4. Better qualifications should mean a more stable market. While tighter loan guidelines might cool the housing recovery, they should also help to moderate price swings in general by discouraging high-risk loans that are more likely to wind up in default and foreclosure in the years to come. For the vast majority of home owners who are not speculating in the market, avoiding sudden price spikes and sharp crashes would help make their homes a safer investment.

Ultimately, it is this last point - greater stability - that is the true goal of the Qualified Mortgage regulations. Even if slower growth at times is one by-product of that stability, the regulators would be happy with the new rules - and it's likely that most homeowners would also sign up for milder price movements and less chance of foreclosure as well.

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