TAMPA — Those reviled mortgages that helped sink Florida’s and the nation’s housing market — “liar loans” and interest-only loans — could be much harder to get come January with the launch of new federal requirements for lenders.
The new rules should help prevent a repeat of the subprime housing crash, consumer advocates say. However, they also could make it harder for at least some innocent bystanders to get loans, too, including the self-employed.
Starting Jan. 10, new lending rules from the federal Consumer Financial Protection Bureau will take effect. It’s hard to imagine why some of the new rules weren’t required all along. For example, a rule called Ability-to-Repay will require lenders to make sure someone can actually afford the loan they’re offering.
That means checking the person’s current income and assets, employment status, credit history, total debts and other financial measures.
The Ability-to-Repay rule also is supposed to end the improper use of low “teaser” rates on adjustable-rate mortgages. For example, before the housing crash, some borrowers got adjustable-rate mortgages as long as they could afford the initial lower monthly payments. Lenders knew the borrowers couldn’t necessarily afford the higher rates that would kick in down the road but assumed they could refinance to lower-interest loans later.
Now, lenders will have to make sure someone can afford the monthly payments no matter how high the interest rate resets to.
The second major change coming Jan. 10 is a little more complicated. The Consumer Financial Protection Bureau will label certain home mortgages as “qualified mortgages,” or QMs, if they follow guidelines designed to make them safer for consumers.
These new qualified mortgages can’t be interest-only loans that pay down interest but not principal. In most cases, they can’t have large balloon payments at the end of the mortgage term. They can’t have “negative amortization,” meaning the principal actually rises over time. And, they can’t have terms that are more than 30 years.
It’s expected that these new safer mortgages will become standard in banking. More than 95 percent of all mortgages being issued already meet the new standards, a CFPB spokesman said.
As an incentive, banks and mortgage companies will have some protection from homeowners’ lawsuits if they follow the qualified mortgage rules.
Getting a risky interest-only mortgage or a loan with a 40-year term has been tough anyway in recent years, because banks have tightened their standards. But the new rules may make them that much harder to get even if banks relax their lending down the road.
Declining to follow the new rules might open lenders up to lawsuits from borrowers who say they were pushed into inappropriate loans.
“I don’t know one of the big lenders that are going to do the non-QM loans,” said Sandy Garcia, a regional executive with Sierra Pacific Mortgage and vice president of the Mortgage Bankers Association of Florida. “We are responsible then if a borrower says, ‘Hey, this lender approved me for a loan that I can’t afford.’ ”
Not all mortgage brokers and lenders are on board with all the changes. For example, one new rule will limit how much debt a consumer can have while qualifying for one of the new loans. If you pay more than 43 percent of your monthly income to debt payments, including a mortgage payment, you won’t qualify. There are some exceptions to that rule.
That doesn’t mean people with lots of debt won’t be able to get loans. But it does mean they might have to buy a smaller house with a smaller mortgage than they’d like, Garcia said.
Meanwhile, people who are self-employed already have a harder time proving their income, and the new rules might make it even harder.
“So, yes, there might be some borrowers that fall through the cracks,” said Barry Zigas, housing policy director for the Consumer Federation of America. “But the vast majority of borrowers will not notice a change from this, other than they’re going to be asked for a lot more documentation of their incomes.”