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Debt Ratio and the "Qualified Borrower Rule"

Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This cap on debt ensures consumers are only getting what they can likely afford. Before the crisis, many consumers took on mortgages that raised their debt levels so high that it was nearly impossible for them to repay the loan considering all their financial obligations. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards − such as that they are eligible for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) − will be considered Qualified Mortgages.

Who Get's Hurt?

Based on interviews with mortgage lenders, real estate trade groups and market research firms, these groups are most likely to find borrowing more difficult when the rules take effect Jan. 10, 2014:

• First-time homebuyers, especially those who are carrying college loans that count toward the debt limit.

• Those who lost jobs in the recession or have had career disruptions in the past five years. Verification of job history and employment standing are key requirements at a time when unemployment has been historically high.

• People who live in either high-priced housing markets or places hit hard by the housing collapse. The most populous U.S. state is among those most at risk: California, hit hard by foreclosures, still has some of the costliest U.S. real estate. Jumbo loan caps under federal housing guidelines have been reduced from over $700,000 to just above $400,000. In California, the average median home price was $352,000, up nearly 30 percent in a year, according the San Diego housing research firm DataQuick.

• Small businesses or independent contractors whose incomes fluctuate, or people who have chosen to shift into lower-paying jobs. This is one of the fastest-growing workplace populations. Recently divorced or widowed people could also face added scrutiny even if they are qualified to borrow.

• Retirees with adequate savings to finance home purchases or refinance. Lack of current income makes borrowing more difficult.

• Homeowners who wish to refinance but have lost some or all of their equity in the real estate bust.

All told, private research firms say that from 10 percent to 50 percent of borrowers who now qualify will lose out.

Qualified Buyer Rule: Will it Crash the Fragile Housing Recovery?

Oh where, oh where has the happy medium gone? After mortgage lenders spent years tossing mortgages to anyone with a pulse, now the rules have swung to the other extreme, preventing many who can afford homes from qualifying for a mortgage.

The old system permitting mortgages to unqualified, sub-prime borrowers clearly needed to be retooled. At the height of the housing bubble, stated income was good enough, never mind having to prove you could handle the payments.

But the Consumer Financial Protection Bureau commissioned with the retooling may have tightened the bolts a little too hard, imposing a debt-to-income ratio of 43% among other restrictions. Private research firms estimate that from 10% to 50% of home buyers who qualify for mortgages under current standards will be shut out of the housing market when the stricter rules take effect on January 10^th, 2014.

“The pendulum has swung from way too crazy to too conservative,” scorned senior economist at CoreLogic, Sam Khater, to U.S. News and World Report.

Better, But Still Not Good

To prevent the lax lending practices that inflated the housing bubble, regulators in 2011 proposed a plan requiring banks and other mortgage providers to retain a partial stake in the mortgages they issued. With part of each mortgage tethered to them, lenders will think twice before issuing loans to unqualified buyers, which they used to dump onto an unsuspecting market before slapping their hands clean.

In that 2011 proposal, only certain mortgages – known as Qualified Residential Mortgages (QRMs) – could be issued with no strings attached to the lender. If a mortgage has a cash down payment of at least 20%, with a debt-to-income ratio of not more than 36%, it would qualify as a QRM, and the lender would be able to issue the mortgage without having to hold a stake in it. Mortgages that failed to meet those qualifications would be considered more risky and would require the lender to retain partial ownership.

But the banks complained that their stake in those riskier mortgages would tie up their money for years, forcing lenders to concentrate their lending on just those applications that qualified as QRMs. This would, in turn, slow the housing recovery by severely limiting access to capital for home buyers who do not have a 20% down payment and for lower-income earners who do not meet the 36% debt-to-income limit.

So just last week, a new proposal was announced to lighten the load on the lenders and at the same time expand mortgage qualification to lower-income earners. They adjusted the criteria qualifying a mortgage as a QRM by eliminating the down payment requirement completely and raising the debt-to-income ratio to 43%.

Lenders could still approve mortgages that do not qualify as QRMs, but they would be required to retain a 5% stake in them and would also forfeit legal protection against failed loans.

David Stevens, president of the Mortgage Bankers Association, applauded the regulators before the Washington Post for recognizing “that the proposal would have unduly constrained the availability of mortgage credit for many borrowers,” and for re-proposing “a much better rule.”

Better for Whom?

Indeed, it is a better rule for the lenders, as they can now lend to more home buyers under a widened QRM classification, with all the legal protections in place. But it is not better for as many buyers as regulators would have us believe.

U.S. News and World Report cites concerns by Jordan Roth, senior branch manager of GFI Mortgage Bankers, a New York-area housing lending firm, who foresees that “some of the stringent guidelines are going to mean that some very qualified borrowers will be turned down.” And Charles Dawson, a National Association of Realtors specialist on housing finance policy, worries that “it could turn lending into a cut-and-dried question about income,” even where the buyer can afford the payments.

Those who would be shut out of the housing market are first-time home buyers who still carry college loans, since these are counted when calculating the debt-to-income limit. (Isn’t the young couple fresh out of college the quintessential image of new home buyers? Not anymore.)

It also shuts-out those who lost jobs over the past five years. (In this recession? There’s a few million crossed off the list right there alone.)

Even small business owners and independent contractors are out of the running for mortgages, since their incomes fluctuate. (So they have it together enough to be self-enterprising and create jobs for themselves and others, and in so doing are somehow disqualified for a mortgage?)

The CFPB admits the new proposed rules would reject more mortgage applicants than before, but the total number of those rejected would grow by only 10%. Others criticize that even one person or family who can afford a mortgage but is rejected all the same is one too many.

Mortgage Restrictions: Making Home Buying Tougher By: Joseph Cafarello www. wealthdaily.com