Changes Coming For Home Mortgages

mortgage rulesBelow are several anticipated changes that will affect home mortgages.
Change: Rising interest rates
What it means: Mortgage payments cost more

If mortgage experts agree on nothing else, they at least agree that interest rates will keep rising. The big questions: When? By how much?

The Federal Reserve has been buying bonds, supporting low interest rates, in an effort to bolster the economy. But with the economy slowly improving, so the Fed’s actions seem likely to end before long. This summer, rates jumped. Now they are hovering around 4.5 percent and are expected to rise further as the economy picks up and the Fed withdraws its support.

Each increase of half a percentage point adds about $25 to $30 a month to the payment for a $100,000 mortgage. HSH estimates that rising mortgage rates plus rising home prices have pushed the typical mortgage payment about 25 percent higher.

“I advise my best friends and anybody I run into that, if you are thinking of buying, you are never going to get a better period of interest rates,” says David Stevens, president of the Mortgage Bankers Association. Rates are bouncing around right now, but his group expects them to reach 4.9 percent next year.

Change: Rising Fees

What it means: Growing government fees (called guarantee fees, or “G-fees” for short) could add $9,000 to $12,000 to the lifetime cost of a $200,000 mortgage

Guarantee fees are smallish government fees built into your loan, usually added to the interest rate. “You don’t see it directly,” says Michael Kitces, director of research at Pinnacle Advisory Group, based in Columbia, Md.

G-fees pay for risk and the cost of selling your loan to investors. But they also have become a mini-ATM and policy tool for Uncle Sam. Congress hiked G-fees to cover a payroll tax cut in 2012. The federal government also raised G-fees to help repay taxpayers for bailing out Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency is raising G-fees again on government-backed mortgages, to raise the cost of government-backed mortgage investments so private lenders can better compete.

The increases are relatively small. Malcolm Hollensteiner, director of retail lending products and services at TD Bank, estimates they currently cost roughly $6 a month for a $200,000 mortgage. Some experts believe the fees could rise by as much as 20 points by the end of this year, which would raise the cost of a $200,000 loan by around $30 more a month — that’s $360 a year or $10,800 over the 30-year life of the mortgage.

Change: FHA’s biggest loans are shrinking

What it means: Your FHA mortgage can’t exceed $625,500

Your borrowing power is limited if you’re using a Federal Housing Administration- insured mortgage. FHA’s limit for a single-family home loan is $271,050 in most areas. Certain pricey counties — for example in California, the New York City region and other parts of the East — have limits of up to $729,750. (In Alaska, Hawaii, Guam and the Virgin Islands, the limits are even higher.)

The top limits are extra large right now because, in 2008, Congress wanted to boost the housing market by helping more borrowers qualify. The extra-high limits expire at the end of this year. If Congress doesn’t act, the biggest mortgage you can get will drop to $625,500. (See FHA limits in your county here; use FHA’s calculator to see how much you might qualify to borrow.)

The bottom line: Borrowers in high-priced areas will have to borrow less from FHA or get “jumbo” loans on the private market. Luckily, few people will be hit. “Our analysts say that less than 5 percent of the loans we insured in 2012 were above $500,000,” says Lemar Wooley, a Department of Housing and Urban Development spokesman.

Change: More paperwork

What it means: You’ll work harder to prove you qualify

New mortgage rules from the Consumer Financial Protection Bureau take effect Jan. 1, 2014. They’re meant to prevent mortgage abuses and unsafe loans such as the interest-only and option-ARM mortgages seen in the boom.

Lenders who want the government to insure their mortgages will have to carefully document that borrowers can afford the loans they’re sold. These added protections mean extra paperwork and “higher levels of frustration” as consumers may be asked for even more proof of credit-worthiness, says Stevens of the MBA. Where lenders used to be easy, even cavalier, about making mortgages, they’ve tightened up already. These rules make the additional scrutiny mandatory. Many lenders, anticipating the change, have incorporated the new rules, says economist Dean Baker, co-director of the Center for Economic and Policy Research.

Change: Lower debt-to-income levels

What it means: You’ll have to pay down debt to get a mortgage

After Jan. 1, most borrowers will be rejected for a mortgage if their total monthly debts add up to more than 43 percent of their gross monthly income.

Currently, some lenders, although not most, write mortgages for borrowers whom they feel are good risks, even if they do have more debt. “You probably do have lenders today who will approve borrowers with a debt-to-income ratio of 50 percent,” Hollensteiner says. “I think we will see a drop in mortgage approvals for borrowers who have higher levels of debt.”

The takeaway: Act quickly to find a lender who will work with you if your debt load is greater than 43 percent, or start paying down your debt so you can apply for a mortgage after December.

Change: Harder to borrow if you’re self-employed

What it means: You’ll jump through more hoops if you’re self-employed

Lenders often pride themselves on finding ways to help out good borrowers who just don’t fit the mold. After Jan. 1, though, there will be a lot less of that. The CFPB rules spell out standards for lenders to use to avoid lawsuits from investors. The lending community is preparing to comply.

“What you’re going to see is that lenders are going to have to be more consistent in their adherence to underwriting guidelines,” Hollensteiner says.

Buyers who have the easiest time are those with a steady paycheck and W-2 forms. It gets difficult when you have a history of job changes, job loss or inconsistent income from self-employment, Stevens says. Small businesses and self-employed workers experience up years and down years, but mortgage underwriters use the lowest year’s income of the past three years when assessing a borrower.

Although lenders theoretically have at least some leeway in judging each application with the new rules, “any variability puts the lender at risk for being drawn into court and being challenged,” Stevens says.

Change: Easier to borrow if you’re wealthy

What it means: You’ll get better rates and more options

New CFPB rules will make it even more difficult for lower-income and self-employed borrowers, Stevens says. One possibility is that two types of mortgage markets will emerge, one for wealthier Americans, who tend to be older and white, and another for everyone else.

High-net-worth borrowers increasingly will qualify for loan options closed to most Americans, he predicts. Those include private banks, credit unions, mortgage banks, mortgages supported by Freddie Mac and Fannie Mae and loans from the three government mortgage programs: the FHA, the Veterans Administration and the Department of Agriculture. These borrowers will typically receive better interest rates not only because they present less risk but also because more lenders are competing for their business.

He predicts that borrowers will need a minimum credit score of about 750 to get a lower-cost conventional mortgage with a smaller down payment. On the other hand, even applications with some wrinkles already have easier sledding with down payments of 20 percent or more.

Families with the wealth to help their adult children make a down payment on a home more often are white.

Change: Harder for low-income borrowers

What it means: Getting a loan is tougher if you’re not a traditional borrower

Since the housing crash, lower-income borrowers — who typically have smaller down payments — have struggled to borrow money. Those borrowers often are the young, minorities and first-time homebuyers. They may have good credit, regular paychecks and enough income to pay a mortgage— but not enough to save tens of thousands of dollars for a down payment.

For these borrowers, the trend is toward options that are now narrowing: the FHA, VA and USDA. But the popular FHA mortgage is becoming increasingly expensive.

At the same time, U.S. households are changing to include more extended families, unmarried couples and unrelated people sharing a home. Often, these households include minorities. The mortgage system has a hard time embracing these “nontraditional” borrowers. When you apply for a mortgage, it’s harder to get the bank to include your income from roommates or from family members to qualify you for a loan.

Multigenerational families are more likely to be ethnic minorities. The Census Bureau reported in 2012 that 13% of Native Hawaiian households and 13% of Pacific Islanders are multigenerational. Among Hispanics, American Indians and Alaska Natives, it’s 10%; among Blacks and Asians, 9%. About 8% of multiracial households are multigenerational, compared with 3.7% of white, non-Hispanic households.

Change: Rise of ‘payday-type’ lenders

What it means: With low credit, you’ll pay much more

If your credit scores are low, you’ll have a hard time getting a mortgage. But options do exist. When the CFPB rules take effect, however, the squeeze will be on for low-credit borrowers, at least if they want a relatively cheap government-backed loan.

“The variety of loan options and flexibility that may have existed previously will undoubtedly be changed. You’re going to see a more homogenized experience,” Hollensteiner says.

But a parallel market is starting to open up for low-credit borrowers, those with dinged credit from recent foreclosures and borrowers with income from irregular sources who can’t get conventional mortgages. They can turn to lenders who sell “nonqualified” mortgages, meaning that the loans don’t meet the government’s standards for consumer safety. For that, they’ll pay considerably more.

Stevens of the MBA calls these companies “payday-type” lenders, and he worries that borrowers could end up over their heads in debt from such loans. But the lenders see themselves as serving a market of otherwise good borrowers who are shut out of conventional mortgages because of temporary setbacks — an illness or job loss, for example — that disqualify them.

“They may look like payday lenders at the worst,” Stevens says. “I think it’s ‘borrower beware.’ We need to be very wary of new companies coming in trying to take advantage of the tight credit standards.”

To be safe, get a free or cheap guidance from a HUD-certified housing counselor. Find one near you here or call 1-800-569-4287.

Change: Jumbo loans are growing in popularity

What it means: The typical borrower is taking on more mortgage debt

So-called jumbo mortgages — loans too big to qualify for government support — are suddenly hot. Jumbos— mortgages of more than $417,000 in most of the country and more than $625,500 in expensive areas — are usually more expensive. But in an interesting twist, since summer, the rates on jumbos have been more competitive.

The Los Angeles Times writes: “Lenders are now offering jumbo loans with interest rates near — and in some cases lower than — rates of smaller conforming loans.” Borrowers with strong credit paid about 4.5 percent with .07 in fees last week for a 30-year fixed-rate mortgage, according to Freddie Mac’s Primary Mortgage Market Survey. At the same time, experts report, you can get a jumbo-sized similar mortgage, with a 20 percent down payment, for an interest rate that’s only slightly — one-eighth to three-eighths of a percent — higher.

Change: Fewer 30-year mortgages

What it means: Adjustable mortgages could become more common

Shrinking the federal government’s participation in the mortgage market, as many in Congress would like, could change the types of home loans we use. Without government support, lenders could raise rates on long-term fixed-rate mortgages, which Americans are used to buying relatively cheaply.

If long-term commitments look riskier to banks, they might promote adjustable-rate home mortgages over fixed loans by pricing them less attractively, says Kitces, of Pinnacle Advisory Group.

“It’s certainly a possibility,” he says. “In some countries around the world, that’s common.”

Adjustable rate mortgages are a useful tool when prudently managed, he adds, “but as we also saw in the financial crisis, a lot of people did that not manage them so prudently.”

Change: Smaller loans are an endangered species

What it means: Little guys and gals are getting squeezed out

The trend is toward larger loans. That’s partly because home prices are rising. They are up 11.2 percent between December 2012 and July, the fastest growth since the bubble popped.

But loan size also is growing because applicants who qualify for mortgages today are wealthier, and wealthier Americans borrow more.

The loans with low balances typically belong to younger, less affluent borrowers, the people having the hardest time getting mortgages now, according to the Mortgage Bankers Association.

Fewer Americans are taking out mortgages with balances less than $150,000, according to the MBA. In the first half of this year, 1.7 percent fewer borrowers received mortgages smaller than $150,000 compared with 2012. At the same time, the number of loans larger than $729,000 grew by 50 percent.

Change: Unsafe loans are (mostly) history

What it means: You can feel more confident buying a mortgage

CFPB rules that go into effect on the first of the year prevent lenders and brokers from steering borrowers into risky, high-cost mortgages, as some did during the housing boom. Other rules make mortgages safer by making them easier to understand and by requiring lenders to make sure a borrower really can repay a mortgage.

The new rules also protect mortgage borrowers from risky “no doc” and interest-only features. They prohibit lump-sum “balloon” payments due at the end of a loan term and ban certain high fees that add to consumer costs. These products got the blame for driving numerous borrowers into foreclosure. They’ve mostly disappeared since the bust, but without these new rules, there would be nothing to prevent them from making a comeback.

Change: More rules to come

What it means: Uncertainty and higher costs

The changes aren’t over. There are more new rules to come, although most will be less dramatic than those taking effect Jan. 1. The Dodd Frank Act, which requires the changes, includes about 1,000 rules in all, and 150 of them directly affect mortgages, says Stevens, of the MBA. Only six of those 150 mortgage rules have been decided on so far.



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