The Consumer Financial Protection Bureau, or CFPB, thinks it can stave off a future housing crisis with new regulations. Starting Jan. 10, a bevy of new rules will come into play, affecting future homebuyers nationwide.
Banks have already adopted some of the changes. They have every reason to. By following new regulations, they'll enjoy insulation from fraud charges or legal liability -- a banker's worst nightmare.
So, with that said, here are the three biggest changes coming down the pipeline.
1. Goodbye, teaser rates
Oh, the teaser rate. If there's one thing that played a role in the last crisis, it's this.
Teaser rates are ... well, a tease. They're used to reduce the monthly cost and interest compounding on a borrower's first few years of a mortgage. After that, the rate resets, usually higher, and borrowers are met with a significantly increased monthly mortgage payment for every month thereafter.
The CFPB doesn't explicitly ban teaser rates, but it does require that lenders consider the full cost of a loan (teaser rates excluded) when modeling a borrower's ability to repay. No longer will banks be able to approve a customer for too big of a loan with the help of artificially low introductory mortgage rates.
2. Fees that wear a hat
The CFPB isn't so happy with fees and points on a mortgage. Under the new qualified mortgage rules, fees will be capped based on the dollar value of the mortgage.
Here's a breakout of the maximum fees by loan amount. Fees are capped at:
- 3% of the loan for loans larger than $100,000.
- $3,000 for loans between $60,000 and $100,000.
- 5% of the loan amount for loans between $20,000 and $60,000.
This would seem like a win for the borrower, but in all reality, banks can make a buck on the front or back end. If banks can't get their desired rake with upfront fees, they'll just bake in the rest in annual interest. Sorry to burst the CFPB's bubble.
What does change, though, is a bank's ability to hide the true costs of a mortgage. Borrowers largely understand interest rates. Hidden fees, however, are another matter altogether.
3. Debtzilla takes a bite
The debt-to-income ratio adds up a borrower's future mortgage payment and other mortgage-related expenses like insurance and taxes, and combines it with their monthly debt payments, like those made to repay student loans or car notes. If a borrower's total debt expenses add up to more than 43% of their gross income, the loan won't be a qualified mortgage. And most banks will promptly deny the borrower.
This new rule could really hurt some first-time homebuyers in higher-priced regions. Starting Jan. 10, all new non-conforming mortgages (think jumbo loans) will have to meet stricter underwriting criteria. More specifically, borrowers will have to beat a 43% debt-to-income ratio.
The good news, however, is that this rule won't affect conforming loans until 2021. So those who shop for lower-priced homes and otherwise meet all other conforming loan requirements won't need to comply. But for those seeking jumbo financing, this change could dramatically affect a borrower's ability to secure a loan.