Five years after the housing collapse, the new Consumer Financial Protection Bureau is closing the barn door on the loose lending that caused the crisis. But as homebuyers struggle to get financing for new homes, some critics fear the door could be permanently nailed shut for many people seeking affordable housing.
The new lending rules will limit people from taking out a mortgage or refinancing an existing one that puts their overall household borrowing at more than 43 percent of their income. That new debt cap also includes a wide swath of common forms of debt that count toward the total, including student loans, most fees and points related a home purchase, and property taxes. It also tightens rules on documentation, and lenders who improvise to give customers easier terms will be open to consumer lawsuits if the loans go bad.
"It will tighten things further. The largest constraint is the 43 percent threshold," says Sam Khater, senior economist at housing data provider CoreLogic. "It will hit more refinances than purchases because a lot of them use a high debt-to-income ratio. It will also hurt home borrowers in distressed environments."
Mortgage lenders say the rules could make loans especially elusive for some classes of borrowers, even those with strong credit scores. Baby boomers entering retirement and young adults will feel a disproportionate impact because of their lower income levels.
Based on interviews with mortgage lenders, real estate trade groups and market research firms, these groups are most likely to find borrowing more difficult when the rules take effect Jan. 10, 2014:
-- First-time homebuyers, especially those who are carrying college loans that count toward the debt limit.
-- Those who lost jobs in the recession or have had career disruptions in the past five years. Verification of job history and employment standing are key requirements at a time when unemployment has been historically high.
-- People who live in either high-priced housing markets or places hit hard by the housing collapse. The most populous U.S. state is among those most at risk: California, hit hard by foreclosures, still has some of the costliest U.S. real estate. Jumbo loan caps under federal housing guidelines have been reduced from over $700,000 to just above $400,000. In California, the average median home price was $352,000, up nearly 30 percent in a year, according the San Diego housing research firm DataQuick.
-- Small businesses or independent contractors whose incomes fluctuate, or people who have chosen to shift into lower-paying jobs. This is one of the fastest-growing workplace populations. Recently divorced or widowed people could also face added scrutiny even if they are qualified to borrow.
-- Retirees with adequate savings to finance home purchases or refinance. Lack of current income makes borrowing more difficult.
-- Homeowners who wish to refinance but have lost some or all of their equity in the real estate bust.
-- Those who live in regions hit by Hurricane Sandy, which have experienced sharp increases in flood insurance. Second-home and rental-property buyers are already having trouble getting financing in many areas. Newly designated Quality Mortgages will encourage lenders to seek more kinds of mortgage and homeowner coverage.
All told, private research firms say that from 10 percent to 50 percent of borrowers who now qualify will lose out. The CFPB, which authored the new rules, concedes that more borrowers will be rejected. But the consumer agency says the people who fail to reach Qualified Mortgage, or "QM" status, tend to be either "very marginally qualified" low-income borrowers or wealthier ones with private lending alternatives, and the exclusions amount to less than 10 percent of those currently eligible.
"Some of the stringent guidelines are going to mean that some very qualified borrowers will be turned down. I do fault [the CFPB] for that," says Jordan Roth, senior branch manager of GFI Mortgage Bankers, a New York-area housing lending firm. "The landscape is being reshaped. But you will still search around and find a lender if your loan makes sense."
Critics point out that the new lending rules are being introduced into a home finance market that is barely functioning as it is. Loan originations have dropped to an annual rate of about $500 billion a year from $1.5 trillion before the housing collapse, according to industry data.
Mortgages are already eight times as difficult to get now than they were in the years prior to the housing collapse, the Mortgage Bankers Association says. The MBA estimates that loan originations will drop 10 percent this year, even before the new rules take effect in 2014.
How, then, is the housing market recovering? Half of all housing sales are made with cash, according to a new Goldman Sachs report, compared with just 20 percent before the housing collapse. Those are not necessarily wealthy people who can afford to buy homes without financing help. Some cash deals result from foreclosure eliminations.
Federal agencies now hold the tab for 90 percent of outstanding home loans, in large part because the government's role expanded under the federal bank bailout. But the government-sponsored entities like Fannie Mae and Freddie Mac are gradually reducing loan purchases, hoping the private sector eventually picks up the slack. The new rules also add restrictions such as fee caps and paperwork for lenders, and some may be discouraged from re-entering a market with new costs and legal risks.
The CFPB says it will monitor the housing market to see if credit has been restricted too much by the new rules. Both congressional critics and Federal Reserve members say they will do the same, since the Washington policymakers are worried about putting more stress on a fragile housing market so critical to the overall economy.
"It could turn lending into a cut-and-dried question about income," says Charles Dawson, a housing finance policy specialist for the National Association of Realtors. "But there are a lot of other things underwriters can consider in what makes a good loan."
The CFPB acknowledges that "there many instances in which consumers can afford a debt-to-income loan above 43 percent." Moreover, it says banks "initially" may be reluctant to lend because of uncertainty over how to implement the rules. But it argues that it is carrying out its Dodd-Frank legal mandate by providing "bright lines for creditors who wish to make qualified loans."
The new credit restrictions aimed at cleaning up debt problems come at a time when consumers are doing a better job than ever in repaying their debt, according to S&P/Experian. Its monthly consumer credit measure shows overall debt defaults at or near all-time lows in a "healthy" credit environment.
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In a vastly changed landscape, banks are skimpy and consumers frugal. That leads some critics to ask if the consumer agency is "still fighting the last war." They fear the "bright lines" that the consumer agency is using to guide risk-averse lenders may be too harsh for the consumers the agency is supposed to help. The result could be more expensive, harder-to-arrange loans for consumers, or outright rejections for qualified borrowers. With interest rates rising, the uncertainty is compounded for borrowers and lenders. In such an environment, default could leap, and that could threaten a repeat of the last crisis.
"The pendulum has swung from way too crazy to too conservative now," says CoreLogic's Khater. "That's human nature. The rules are aimed at protecting consumers from hurting themselves. Now that there is a hard-and-fast rule being used in place of traditional underwriting standards, ironically, the market will not be deciding [who is creditworthy]. No one knows what the impact will be."
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