New rules to prevent irresponsible mortgage loan practices that led to foreclosures during the housing crash may slow the process for consumers as lenders become more cautious vetting a potential borrower.
The new rules that took effect on Friday written by the Consumer Financial Protection Bureau, will hold mortgage lenders legally responsible for ensuring that consumers can pay back their loans and create a new qualified mortgage category with better protections for borrowers. Approximately 1 in 10 homeowners with a mortgage still owes more than their home is worth, said CFPB Director Richard Cordray in a speech on Friday. "Throughout the United States, 2 million households still remain at high risk of foreclosure," Cordray said. "To fix this broken system, the central principles of our mortgage servicing rules are no surprises and no runarounds. Simply put, consumers should not be hit with surprises by those responsible for collecting their payments."
Qualified mortgages cannot include risky features including interest-only payments or terms longer than 30 years. Upfront fees for a qualified mortgage also cannot be more than 3 percent of the total mortgage balance, which will ensure more first-time home buyers can qualify for loans.
During the speech Cordray also countered the perception that the new rules will "bog people down in red tape."
"They amount to little more than taking the time to work directly with customers to address their personal circumstances," Cordray said of the new rules.
As a result of the new rules, some mortgage terms will be prohibited and higher down payments will likely be more common, says David Blitzer, managing director at Standard & Poors Dow Jones Indices. "New mortgage rules are designed to eliminate some of the most egregious mortgages seen before the financial crisis," Blitzer says. "While the cost to lenders of mortgages may rise due to paperwork and elimination of some mortgage terms, both lenders and borrowers will benefit from expected lower default experience."
Implementing the new rules to avoid new, more severe legal penalties for approving bad loans will cause mortgage lenders to be more cautious during 2014, says Bob Davis, an executive vice president at the American Bankers Association who analyzes mortgage policy.
"Borrowers will also have to be prepared to disclose more information for a mortgage," Davis says. "Be patient. Credit-ready people will get their loans."
Lenders with fewer resources than large firms may be at a disadvantage while they implement the new CFPB rules, says Davis.
"Having said that smaller lenders typically have the advantage of knowing more about the community than larger lenders," Davis says. "We will have to see how that develops in the marketplace."