New federal mortgage rules going into effect in the new year are aimed at preventing a repeat of the mortgage meltdown that led to millions of Americans losing their homes.
The rules make stricter lending practices official but may not change much of the industry’s day-to-day practices because lenders have already tightened their credit standards in response to the housing crash.
“The new rules are really more of a formalization of the type of rules we’ve had in place,” said Keith Gumbinger, vice president of HSH.com, a Riverdale, N.J.-based mortgage information company.
Having suffered huge losses after lending too freely, mortgage lenders “have become very disciplined about making sure you can actually afford the mortgage you’re applying for,” he said.
The rules from the federal Consumer Financial Protection Bureau, effective Jan. 10, include:
• Lenders must base their decisions on a borrower’s ability to repay the mortgage. During the housing boom, lenders often wrote exotic loans that were affordable only for a year or two, when monthly payments were kept artificially low. When payments rose, homeowners fell into default.
• Lenders can’t write mortgages unless the borrowers’ monthly debt payments (including the mortgage, car loans and other debt) come to no more than 43 percent of their income.
• Mortgage fees cannot exceed 3 percent of the loan amount. Loans can’t have risky features that were popular during the housing boom, such as payments that cover only the interest on a loan.
• Mortgage brokers can’t receive higher fees for recommending loans that cost the consumer more.
• Mortgage servicers cannot initiate a foreclosure until a borrower is more than 120 days delinquent or if they’re also working with the homeowner to modify the loan to make it more affordable.
In addition to these rules, the Federal Housing Administration will no longer guarantee loans for more than $625,500, a drop from the previous $729,750. This change affects higher-cost areas. Fannie Mae and Freddie Mac, the large mortgage finance companies, have already dropped their loan guarantee ceilings to $625,500.
The FHA change means that buyers of homes that cost more than $625,500 will not be able to get FHA loans, which allow for down payments of as low as 3.5 percent, but will instead have to get jumbo loans, which usually require down payments of at least 20 percent.
However, the change will probably not have much effect. Few buyers of expensive homes choose FHA loans because the loans have high fees and because affluent buyers can usually afford larger down payments, Gumbinger said.