Will the New Mortgage Rules Help or Hurt You?

A new set of rules governing the mortgage market went into effect on Friday. Here's how they're likely to impact you.

Jan 11, 2014 at 9:56AM

Bank Owned Sign
Source: Colin Robertson with The Truth About Mortgage.

If you're in the market for a mortgage, then a new set of rules that took effect on Friday should be high on your radar.

In an effort to stamp out the riskiest types of mortgages that fueled the housing bubble and subsequent crisis, the Consumer Financial Protection Bureau implemented two fundamental changes to how lenders make home loans, known as the ability-to-repay and the qualified-mortgage rules.

With this in mind, I asked mortgage professional James Adair with the Aspire Mortgage Group in Portland, Ore., to tease out how these new standards are likely to impact prospective borrowers.

Q: Can you explain what a qualified mortgage is and why homebuyers should care about it?

A: This is the new verbiage invented by the federal government that encompasses a variety of rules mortgage lenders must adhere to. On paper, the qualified mortgage rules only marginally appear to cramp a borrower's ability to get a mortgage. For instance, according to USA TODAY, the CFPB estimates that 92% of mortgages in the current marketplace already meet the new requirements.

Borrowers should care because, in simple terms, the mortgage process automatically became more conservative on January 10th. Not dramatically so, but more conservative nonetheless.

Q: How are the requirements under the new qualified mortgage standard different from before?

A: Here's one way to think about it: The new rules are designed to reduce the risky type of lending that fueled the housing crisis.

Under the ability-to-repay rule, which accompanies the new qualified mortgage standards, lenders must make a bona fide effort to determine whether or not a borrower can actually afford his mortgage payments. As such, lenders are now obligated to document and verify an applicant's income, assets, credit history, and current debt load. Gone are the days of no- and low-documentation loans.

Lenders are also now prohibited from lacing mortgages with the risky features that prevailed before the crisis. Low "teaser" rates are out, as are negative amortization loans, where a borrower's monthly payments are less than interest accrued. There is also a new upper limit to a borrower's monthly debt-to-income ratio. It's now 43%, whereas it was 45% previously.

One of the biggest changes concerns fees. To be considered a qualified mortgage, a loan can no longer have fees that exceed 3% of the loan amount. While it's rare that a conforming or FHA/VA loan would have fees that exceed that threshold, the one area that could be affected is private-label mortgage insurance, which oftentimes call for upfront payments at close. For instance, a PMI policy might cost 1.37% of the loan amount, limiting any remaining fees to 1.63% of the mortgage.

Q: Is this a dramatic shift in the mortgage market, or rather a small adjustment?

A: In a way, it's both. The biggest change is that we now have tangible federal rules provided by the government combined with a new enforcement agency, the Consumer Financial Protection Bureau. It's the mere existence of the CFPB more than anything else that marks the new regulatory dynamic -- which, it turns out, is a pretty big deal.

Underwriters and lenders are now going to be on their best behavior, and "jump-ball" type decisions that an aggressive underwriter might have allowed to get approved in the past are going to be looked at much more conservatively. No lender in America wants to be the first to challenge the rules or push the envelope. The penalties are very stiff; stiff enough, in fact, to potentially put a small mortgage company out of business.

Thankfully, the new rules appear to be largely on par with how things had been going in the last 18 months anyway. So fundamentally, things aren't that different, and particularly for borrowers. But I can tell you that being a mortgage professional feels a bit different, and I can only imagine what it must feel like to own or manage a mortgage company in this environment. Probably not awesome.

Q: Are banks likely to write mortgages that don't meet the new standard? And, if so, under what circumstances would they be willing to do so?

A: This is the most interesting thing to pay attention to. Just recently, for example, The Wall Street Journal had an article about how Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and JPMorgan Chase (NYSE:JPM) are all preparing to make mortgages that fall outside the new standard. These are likely to be loans to high net worth individuals that the banks will keep on their balance sheets to appease existing customers.

Beyond this, I think it's very likely that we'll see new outlets for loans pop up in the next 12-24 months. It could be the dawn of a new mortgage marketplace similar to what we used to call "sub-prime."

Certainly there will be, and always have been, high-quality loans that the current mortgage industry can't or won't make, and the qualified mortgage standard will increase this population. To the extent that there will be a new type of mortgage lender that doesn't sell into the current Fannie/Freddie system, they will probably allow for some expanded kind of income documentation. To me, that seems to be the most obvious place where the good borrowers are getting shut out right now.

Q: How is the new qualified mortgage standard likely to impact the housing market, and why?

A: The easy answer here is that it will be a drag on the housing market in the short term. To what extent, I can't say exactly; it may not even be noticeable. But long term, if we get private capital to flow back into this space for borrowers who don't meet the qualified mortgage requirements, it could end up being a boon to the housing market!

Looking for the one stock that could make you rich?
The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those rare stocks that could make you rich. To find out which stock it is, download our special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report instantly and for free.

John Maxfield owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers