Slamming the door on “liar loans” and other shoddy underwriting practices that contributed to the financial meltdown, the Federal Reserve has proposed new rules requiring mortgage lenders to verify that borrowers have the ability to repay the loans they obtain. The rules implement a provision of the Dodd-Frank financial reform legislation that established the ability-to-repay requirement but left it up to regulators to craft the details.
The new underwriting standards will apply to virtually any loan secured by a residence, with the exception of open-end credit plans, reverse mortgages, and construction or other temporary loans with terms of 12 months or less. The proposal gives lenders two primary compliance options:
- By verifying extensively the borrower’s income and assets, or;
- By making a “qualified mortgage.”
Under the general verification standard, option, applicable only to loans with no high-risk features (negative amortization, interest-only or balloon payments) lenders would have to consider and verify the borrower’s income or assets, current employment status and credit history; the monthly mortgage payment and payment on any “simultaneous” mortgage; the borrower’s current debt obligations and monthly debt-to-income ratio.
Lenders who go beyond those minimum requirements could qualify for a legal safe harbor by originating a “qualified mortgage,” defined as a loan that does not contain any of the high-risk features cited in the general standard and caps points and fees at a maximum of 3 percent of the total loan amount. Additionally, the loan must be underwritten based on the maximum interest rate applicable in the first five years and must use a payment schedule that fully amortize the loan over the loan term.
The Fed is seeking comment on an alternative to this qualified mortgage option that would offer a “rebuttable presumption of compliance” rather than a safe harbor, on loans that meet all the criteria for the safe harbor and the general verification standards.
Industry executives are beginning to submit comments on the proposal (due by July 22) but several have noted that liability concerns will be significant.
"It doesn't take much to imagine in the investor community and the originator community that these new liabilities reverberate," Ken Markison, associate vice president and regulatory counsel for the Mortgage Bankers Association (MBA) told reporters.
Glen Corso, managing director of the Community Mortgage Banking Project, representing independent mortgage bankers, agreed. If lenders perceive themselves to be vulnerable to court challenges, he told the Washington Post, “It will mean less business for lenders, less credit availability and higher costs for consumers.”
Fed officials have said that they are going to turn over comments they receive to the Consumer Financial Protection Bureau, slated to begin operating in July, which will assume responsibility for issuing the final regulation.
That’s Boston, according to a recent CNNMoney report, which lists the city as one of the 10 “top turnaround towns” leading the country in recovering from the real estate downturn. That’s based on an analysis by Move.com, which cites as the major indicators of recovery: Listings have declined, home purchase demand remains strong, and the area’s unemployment rate (around 7.1 percent in March) is better than the national average of around 9 percent, which means the Boston housing market “is well positioned to ride the economic recovery to better times,” the article suggests.
Other industry reports are beginning to reflect some improvement in the battered national housing market as well. Although foreclosures remain high, the delinquency rate declined by 1.17 percent in the last quarter of 2010, putting the percentage of past due mortgages (7.79 percent) nearly 1.l60 percent the year-ago figure, according to the Mortgage Bankers Association (MBA). Foreclosure starts also declined to their lowest level since the end of 2008, Jay Brinkmann, the MBA’s chief economist, noted in the association’s quarterly report. “These numbers point to a mortgage market on the mend,” Brinkman said.
And the picture may be even brighter than the MBA’s quarterly report indicates, Brinkman suggested, simply because the national figures are skewed by particularly dismal figures in hard-hit markets. The number of foreclosures in Florida alone exceeded the total number of loans outstanding in 22 states, Brinkman noted. “That’s why I don’t put too much stock in the national numbers, he said. “The problem states have too much impact on them.”
BLOODIED BUT (MOSTLY) UNBOWED
The dizzying collapse of the housing market and its slow, uneven recovery, are making homeowners and prospective buyers a bit schizophrenic – discouraged about market conditions and pessimistic about the prospects for a rebound in home values, but still convinced that housing remains a desirable goal and a good investment.
On the negative side, the U.S. home ownership rate declined to 66.4 percent at the end of the first quarter of this year, the lowest level in nearly 15 years, erasing virtually the entire gain recorded during the housing boom. Foreclosures, converting former homeowners to renters, and tight credit, preventing many would-be buyers from purchasing homes, partly explain that trend, Paul Dales, senior economist for Capital Economics, suggests. “But it also seems likely there has been a reduction in the desire to own a home now that it’s clear housing is not a one way bet,” he told DS News.
A nationwide survey conducted by the Pew Research Center challenges that view. More than 80 percent of the respondents said they still view buying a home as “the best long-term investment” they can make. Even those who said their homes have declined in value (about half the 1,222 respondents were in that category) agreed either “strongly” or “somewhat” with that positive assessment.
Although the poll reflects continued confidence in homeownership, the intensity of that faith has declined. A year ago, 49 percent “agreed strongly” and 35 percent agreed “somewhat” that homeownership is a good investment. In the more recent poll, only 37 percent were in the “agree strongly” category, while the less confident column increased to 44 percent.
Although existing homeowners view ownership more positively than renters, renters still view ownership as a desirable goal. Only 24 percent said they are renting out of choice and 81 percent said they hope to become homeowners one day.
All things considered the residual faith in homeownership is “impressive,” Paul Taylor, co-author of the Pew report, said. “In modern economic history, we’ve never had a five-year period where home values have fallen as long or as far as they have now.”
The favorable view of homeownership may be impressive, but isn’t blind. Homeowners who say their homes have lost value think it will take at least three years for them to recover that lost ground; 42 percent say recovery will take at least six years. □
Despite rough going (to say the least) in the stock market last year and high levels of economic distress, investors continued to make contributions to their retirement accounts and most avoided the temptation to borrow from them to close income gaps. Only 2.4 percent of participants in 401(k) defined contribution accounts stopped contributing to them last year, according to the Investment Company Institute. That’s down from 3.4 percent who halted their contributions in 2008. Most also “stayed the course,” sticking with their existing asset allocation plans. Only 3.5 percent of plan participants took withdrawals last year, according to the ICI report, a slight increase over the 3.1 percent who withdrew funds in 2009.
Separately, Fidelity Investments reported that the average balance in 401(k) accounts increased by almost 12 percent, to $74,900 as of March 31 of this year, the highest level since the company began tracking this information in 1998. “A lot of people will say that doesn’t sound [all that great],” Beth McHugh, vice president of market insights for Fidelity, noted. But the account balance for “10-year continuous participants” is $191,000, and for continuous participants who are 55 and older, the average is $233,800 – proof, McHugh said, that contributing consistently to a retirement savings plan “makes a difference.”
You can file this under, “DUH!” A recent survey has found that rising gas prices encourage home buyers to seek properties closer to where they work. Nearly three quarters of the Realtors responding to a Coldwell Banker survey said the spike in gas prices has had an impact on where their clients want to live; 93 percent agreed that if prices remain high, more prospective buyers will opt for locations that will reduce their community distance.
Somewhat more interestingly, although not surprisingly, the survey found that buyers are more interested today than they were five years ago in a home office; 68 percent of the respondents attributed that trend partly to rising transportation costs.
“The decision to buy a home has always been tailored around the personal, multi-faceted lifestyle needs of each buyer,” Jim Gillespie, CEO of Coldwell Banker Real Estate, noted in a press release describing the survey results. Increasingly, he said, rising gas prices are influencing how buyers are defining their lifestyle preferences and their housing needs.
Brokers who see the price of gas as an increasingly important factor in the home buying equation said 89 percent of the buyers they see are seeking homes closer to where they work and 45 percent are seeking locations close to shops and services, reflecting what many respondents reported as an increasing interest in urban living. More than half (56 percent) of the industry professionals responding to the survey noted that trend, and 93 percent of them agreed “strongly’ that a desire to reduce commuting costs was a major factor.
The more significant question, of course, is whether the trends noted in this survey and others will persist or, as in the past, evaporate quickly if gas prices begin to decline.