UPDATE: See link for rules on QM.
On Thursday, January 10th 2013, the U.S. Consumer Financial Protection Bureau (CFPB) is expected to deliver the definitions and rules that make a qualified mortgage. This will be the new post-housing bubble crash mortgage criteria that the CFPB, financial industry lobbyists and legislators have been deliberating on for more than a year. Both mortgage lenders and borrowers will be protected under the new system, but this protection comes at a cost that homeowners will have to shoulder.
A Great Deal for Lenders
A qualified mortgage meets the guidelines set forth by the CFPB for the purpose of being guaranteed by Fannie Mae and Freddie Mac, the two government-sponsored entities that have been instrumental in keeping the residential lending market alive since the start of the global financial crisis. The mortgage lending industry has a vested interest in qualified mortgages since banks are not planning to keep many residential loans in their portfolios; they would rather hedge their risk with guarantees from Fannie and Freddie.
The new rules are designed to instill responsibility and prevent the return of unrestrained subprime mortgage lending seen in the early 21st century. To this day, banks are still shelling out millions to settle legal claims filed by borrowers, investors and regulators due to the loose and irresponsibly mortgage lending practices of yesteryear. Qualified mortgages will give lenders legal protections and keep them from loosening their standards.
The new measures will also protect borrower in the sense that they will not be tempted to apply for mortgages they can’t afford, but lenders are clearly getting the upper hand in terms of legal protection. Analysts have remarked that these protections will increase mortgage origination costs for the lenders, which in turn will be passed on to the borrowers.
Not a Good Deal for First-Time Home Buyers and Low-Income Borrowers
In the end, qualified mortgages will not help low-income applicants and families who plan on buying a home for the first time. The credit and underwriting guidelines in the U.S. have been restrictive since 2008, and the new qualified mortgages could end up creating an exclusionary lending environment.
The best hope at this time for working-class borrowers and first-time home shoppers is to increase their savings and reduce consumer debt down to 43 percent of their earnings. This is the expected 43 percent debt-to-income ratio of a qualified mortgage. Once the final ruling is issued, mortgage applicants should carefully review the new criteria since they will have an opportunity to take their lenders to court if they don’t play by the new rules.
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