A new set of mortgage rules that are scheduled to go into effect Jan. 1st 2014 may possibly make it harder for many middle class Americans to be able to qualify for a home loan.
The rules are intended to prevent another housing crisis similar to the one experienced five years ago that moved the economy into a recession. These rules are but one of many steps that the federal government has taken in order to put less risk into the marketplace and ensure greater stability in lending.
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How New Mortgage Lending Rules Could Affect You
The new rules that are scheduled to take effect came about as part of the Dodd-Frank bill. If the rules continue in their original forms, one of the things that they will do is prohibit banks from approving loans where the borrower has a debt-to-income ratio that is greater than 43%.
The ability-to-pay rule, which is also known as the Qualified Mortgage rule, means that the borrowers total debt liability cannot (including housing) exceed 43% of their income. So, suppose you make $100 in month and your total debt liability was $50. In this case, you must pay $50 in debts every month. Your debt-to-income ratio would be 50%. This would also mean that your debt-to-income ratio would be too high for you to qualify for a mortgage.
However, there are also protections that are being put in place for consumers, though not everyone is in favor of them. For example, banks will be limited to charging fees that are no greater than 3% of the original loan amount. Of course, this will necessarily lower the amount of revenue that banks will take in, which they will likely try to make up for in other ways.
Banks Want to Delay Rules
Banks remain concerned that the new rules will have an impact on their bottom line and potentially undercut the already fragile housing recovery. There is also uncertainty about whether certain financial institutions will be ready for the new rules that go into effect at the start of the New Year.
Matthew Williams, a Nebraska banker who is chairman of the American Bankers Association, claims that without a delay of six months to one year banks will have to cut back on mortgage lending to avoid legal complications. There is already an official request for delay pending at the Consumer Financial Protection Bureau (CFPB).
In order to mitigate some of the concerns that have been set forth by many large banks, some software companies are developing programs that banks can use in order to follow the new rules. Richard Cordary, the director of the Bureau of the (CFPB) has indicated that banks are making many gains in order to stay compliant with the new rules and that the bureau is there to help along the way.
One of the most widely accepted rules in economics is that individuals act within what they think is their own self-interest. What the (CFPB) hopes to accomplish is to strike a balance between the interests of banks who are trying to make a profit, and consumers who are trying to get an affordable loan. Let’s hope that the proper balance ends up being struck even if the initial target ends up being missed.
