The Dodd-Frank Act, with its 2,000 plus pages, was signed into law on July 21, 2010 and touted as a consumer protection Act. In some ways that appears to be true. In others it appears to be a lender protection Act. We’re learning more as hundreds of pages of rules to implement the regulations are being written and released.
Title XIV of the Act, which covers the Qualified Mortgage Regulation and its accompanying Ability to Pay Rule, will go into effect on January 10, 2014. Lenders who write “Qualified Mortgages” will have some protection from liabilities and rules imposed elsewhere in the Act.
To an individual who was borrowing money to buy a home back in the 80’s, the Ability to Pay Rule will look like a return to the past. Back then, banks wanted to be sure that a borrower could repay the debt before they lent money. Now, the government is insisting that they do so – with some exceptions.
Pursuant to the Ability to Pay Rule, lenders must consider and verify, at a minimum, the following eight underwriting standards:
1. Current income or assets
2. Current employment status
3. Credit history
4. The monthly payment for the mortgage
5. The monthly payments on any other loans associated with the property
6. The monthly payment for other mortgage related obligations (such as property taxes)
7. Other debt obligations
8. The monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage
It sounds just like the old rules that were thrown out the window in the years leading to the mortgage crisis.
The Act does contain some consumer protection provisions. For instance, it limits the amount lenders may charge for upfront points and fees, as well as for the discount points that lower the interest rate.
A borrower’s debt to income ratio will be capped at 43% of his or her pre-tax income. While some believe this to be an ill-advised provision with regard to high end homes and high income borrowers, part of the provision will protect mid to low income borrowers. That is the fact that this ratio can no longer be computed using payments based on a “Low introductory interest rate.” The borrower’s debt to income must be calculated using payments at the highest interest rate possible under the terms of the loan.
Thus, while a borrower may receive an initial low rate on an Adjustable Rate Mortgage, his qualification will be dependent upon the payment after the loan re-sets all the way to the interest rate cap.
Calculating ability to repay based on low teaser rates was one of the toxic loan features that put people into homes they couldn’t afford – and led to widespread foreclosures. Interest only periods, negative amortization, balloon payments, and loan terms over 30 years are also disallowed under the new regulations.
However, as some analysts are quick to point out, exceptions, exemptions, and loop holes do exist. America may not yet have seen an end to bad lending practices.
If you’re planning to purchase a home in Texas, get in touch. I’ll search out the best loan for you and your circumstances. Once I have you pre-approved, I’ll furnish you with a letter to submit with your home offer – increasing your chance of being the winning bidder in the hot Texas real estate market.
Mortgage loan pre-approval should be the first step in any home buying plan.
Texas Mortgage Banker