New mortgage rules roll out today, and Omaha-area lenders expect some effects on homebuyers — in certain cases lengthening the application process and in others perhaps even ruling out a purchase.
The Consumer Financial Protection Bureau wrote the “ability to repay” and “qualified mortgage” rules in the wake of the housing market crash and in accordance with requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed by Congress.
Changes are aimed at ensuring that only consumers able to repay home loans actually get them. So the rules, for example, include a lender prohibition on using “teaser” interest rates and the resulting temporary low payments to determine ability to pay.
Lending institutions that want to be covered by legal protections in the case of defaults must follow more specific and stepped-up procedures that verify income and credit history.
Many industry leaders like Alan LaFollette of Pulaski Bank welcome the scrutiny, saying it forces more “attention to detail during the loan process.”
“We’re under a tighter grip, a bigger magnifying glass, and that’s certainly OK,” said LaFollette, vice president of the bank’s Iowa and Nebraska region. “At the end of the day, it’s going to have a really good impact on our industry.”
He expects a learning curve that has the potential to stretch out the home-buying process a bit.
In addition, some lower-income borrowers might no longer qualify for a home mortgage under the tighter income-to-debt ratio, said LaFollette. Generally, but with some exceptions, the home-seeker’s debt including mortgage payments is not to total more than 43 percent of gross monthly income.
The rules establish a standard for what the government considers a “qualified mortgage.” Such loans, for example, limit the payback period to 30 years or less, prohibit most balloon-payment loans and stop risky features such as negative amortization and interest-only periods.
Bank of the West is among institutions that have announced they will continue to offer interest-only mortgages even though they do not fit the bureau’s definition of a qualified mortgage. The bank said that an interest-only loan meets the needs of certain customers, such as the self-employed or those interested in cash flow.
“Bank of the West is not going to constrain itself only to qualified mortgage loans,” said Stew Larsen, head of the bank’s Omaha-based mortgage division.
He said the bank still will continue to require that all borrowers meet prudent underwriting criteria and will ensure that consumers have the ability to repay once the interest-only period on a loan has expired. Bank of the West will hold the loans in its portfolio as it has done for many years, he said.
Overall, Larsen said, he doesn’t anticipate as heavy an impact on homebuyers as many were led to believe, and that bank representatives have been speaking to Realtor groups to pass along that message.
Kelley Harwood of First National Bank said a new rule also to take effect this month regarding appraisals potentially could delay a closing. Borrowers must have at least three days in advance of a closing a copy of any appraisal or other document used by the lender to determine value on a property.
Harwood said that while his bank already provides a free copy of an appraisal, a borrower now must have at least the three days to review it.
For the most part, Harwood anticipates no significant slowdown in business.
“We’ve had a lot of time to prepare and we’ve worked very hard to make sure we don’t impact the customer.”
From a Realtor’s perspective, Mike Riedmann of NP Dodge Real Estate foresees a more intense application process for the homebuyer as lenders seek more verification.
“Until everyone becomes more accustomed to the procedures, everybody probably will be a little more cautious, slower.”
Riedmann, president of residential sales, said that with the low inventory of for-sale homes in the Omaha area, NP Dodge agents already have been urging clients to start the mortgage approval process before they find a house. That way, he said, when they find their dream home, they can pounce before their competitors.