In 2013, we finally saw hard evidence that the real estate market is ready for some positive changes: home values have increased, bringing many underwater mortgages to value or better, foreclosures have slowed and everybody is generally in a pretty good mood. If you’ve been putting off buying a home, 2014 is your year.
There have been a lot of changes to the rules surrounding mortgages, as well, but they’re not all bad. Many, in fact, should serve to help keep the good days around by eliminating reckless lending and giving consumers more information about their loan products. Let’s take a look at what’s new in 2014 and how these rule changes will affect your real estate purchases this year.
The Integrated Mortgage Disclosures Rule
Under the Dodd-Frank Act, the Truth in Lending Act and the Real Estate Settlement Procedures Act (RESPA) disclosures have been combined for most new home loan originations, except for home equity lines of credit (HELOC), reverse mortgages or mortgages secured by a home not attached to real property, such as a mobile home. These bulky forms have been combined into just two, one presented to a prospective borrower and another near closing.
One of these forms, the Loan Estimate form, replaces the Good Faith Estimate (GFE) and the early Truth in Lending (TIL) disclosure. The other, the Closing Disclosure form, replaces the HUD-1 and the final TIL disclosure. Along with the new forms, the Integrated Mortgage Disclosures rule places tight restrictions on changes that can be made to the cost of settlement services already outlined on the Loan Estimate form.
Although this rule isn’t required to be in place before August 15, 2015, you may begin seeing these forms pop up as banks come into compliance with the upcoming changes. Home buyers involved in form testing found the new forms to be much more understandable than the old forms and were able to answer questions about the loans described much more accurately on the new forms.
These new forms will help you better comparison shop for loans, since they combine several forms into one easy to understand document — larger fonts also make for easier readability, reducing confusion. You will be able to trust that your lender’s pricing disclosures will be much more accurate under the Integrated Mortgage Disclosures rule and you won’t have any surprises at closing — a great relief for anyone who has bought a home in the past and was forced to scramble for money to cover extra fees at the last minute.
These changes may seem trivial, but they’re part of an overall effort by the mortgage industry and their regulatory bodies to ensure that borrowers understand the commitment they’re making. Everything from home buyer education to increased disclosure requirements have been tried repeatedly to help increase borrower awareness, but I suspect this time around lenders will feel more pressure to really teach their borrowers a little about the lending process.
The Ability to Repay Rule
This one still has all kinds of people up in arms and for no good reason. The Ability to Repay rule makes it a lender responsibility to be reasonably certain that you can repay what you borrow when buying a home, but excludes products like home equity loans, timeshare plans, reverse mortgages and temporary loans.
In practice, most reputable lending institutions have been doing what the provisions require all along, if for no other reason than to earn repeat business. It was the fly-by-night mortgage brokers and their investors who were most guilty of not concerning themselves with the finances of those people who were relying on them for affordable mortgage products. Instead of properly weighing a potential client’s wants against their ability to repay the loan, these entities would find ways to qualify people who weren’t in a financial position to afford the loans they got.
Under the Ability to Repay rule, lenders are going to be required to verify your current income and investments, your employment status, your credit history, and the final payment for the mortgage you’re borrowing. Other payments, including the monthly payments on any other concurrent mortgages (such as seconds), mortgage-related expenses, including taxes, and the monthly payment on other monthly debts are also verified. All of your debt payments, taken together, are then compared to your total monthly income and your debt to income ratio is calculated, as well as your residual income.
For people who have been borrowing from traditional banks using Fannie Mae, FHA, VA or USDA products, this process will sound familiar — because it is. This is the way that the industry has been risk-assessing borrowers for some time now, but it was never a requirement. Banks just saw that it was a good idea to make sure borrowers were credit-worthy so that they would eventually pay their mortgages back. The Ability to Repay rule strictly forbids using introductory rates to determine eligibility, which is a good thing — if you have an adjustable rate mortgage (ARM), you have to be able to still afford it once it adjusts.
Proper qualification is the bulk of this new rule, but the changes also encourage banks to help customers out of high risk mortgages into stable, fixed-rate mortgages (FRM). In these cases, as precisely defined in the new rule, banks can forgo any or all of the verification process in order to stabilize a loan and protect it from foreclosure. No one anticipates this portion of the law to be used often, but it’s nice to have the exemption built in.
Borrowers aren’t likely to notice much difference between borrowing in 2013 than in 2014 due to the Ability to Repay rule. Reputable banks have already been doing these verifications and will continue to do them whether or not there’s a law in place — they’re simply not in the business to lose money. Mortgage brokers and investors, however, may find that they are suddenly playing by the same rules as everybody else and make themselves much scarcer than they already are.
The Qualified Mortgage Rule
Banks, brokers and investors are much more likely to notice the changes brought by the Qualified Mortgage rules than the typical borrower. Traditional 30-year FRMs will see only minor changes, but there will be less incentive to write the most exotic mortgages. The use of Qualified Mortgages is meant to protect lenders from significant loss and provide safe harbor in the event that a borrower alleges the lending institution knowingly made them a loan they could not repay.
In general, loans allowed to experience negative amortization, those with interest-only or balloon payments, terms longer than 30 years and no doc loans are going to be things of the past since they lack the protection of the Qualified Mortgage rule. There are some exceptions, especially when the lender is willing to keep a risky loan on their own rolls instead of selling it on the open market, but I find it unlikely many banks will jump into these loans in the first few years of the Qualified Mortgage rule.
For the rest of the decade, we’ll probably see loans limited to those that Fannie Mae will purchase or FHA and VA will insure — lenders are still spooked by their near extinction, though they are getting braver. To keep that bravery in check, the Qualified Mortgage rule has imposed limits on upfront fees and points the lender can charge to any given borrower — three percent of the loan amount is going to be the typical figure.
Since most borrowers do so with traditional mortgage products, you’re unlikely to run into problems with the Qualified Mortgage rule, provided you’re borrowing from a bank that lends its own money or lends government-insured money for FHA or VA programs. These banks already take lower fees for their loans, and many loan programs already have similar pricing caps. Banks lending their own money know they will make far better returns in the long-run in interest payments. Again, brokers are going to be hardest hit, since they have to make all their money upfront because they neither service nor invest in the loans they sell.
The big three we’ve discussed made the news over and over and over again in 2013, but there were several smaller changes that you probably missed. The most important of those were:
High-Cost Mortgage and Homeownership Counseling Amendments
Despite all efforts, there will still be some need for higher cost mortgages, which are defined as one of these: a first mortgage with an APR greater than 6.5 percent higher than the prime rate, a personal property loan of less than $50,000 or second mortgage with an APR more than 8.5 percent above the prime rate and loans with excessive points and fees: greater than five percent on a loan over $20,000 or the lesser of either eight percent or $1,000 on loans under $20,000.
In 2014, these expensive loans will be more heavily regulated and prepayment penalties, balloon payments, late fees exceeding four percent of your payment, most fees for pay-offs and all fees for loan modifications will be eliminated. Lenders will also have to disclose in writing that you’re using a high-cost mortgage and provide you with homeownership counseling about your loan product.
Mortgage Loan Originator Compensation and Qualifications Rule
A little rule change with some potentially big benefits for borrowers, the Mortgage Loan Originator Compensation and Qualifications rule will prevent loan originators from receiving pay based on selling particular loan terms. For example, they won’t receive additional compensation for talking you into buying extra points or taking a loan with higher fees, nor can they be paid by a particular lender for a loan they’ve made on your behalf. In addition, all loan originators will be required to be properly licensed or trained, as is appropriate for their affiliation and location.
By requiring training and unlocking compensation from loan terms, the hope is that brokers will offer better loan prices for customers across the board. Sometimes it makes sense to use a mortgage broker, but unless you’re loan-savvy, it can be hard to know what loan terms are really best for your situation. Making pay less dependent on selling loan products should turn less reputable brokers from used car dealers to educators.
New Mortgage Servicing Rules
Sweeping changes are in store for the rules governing mortgage servicing, as well. Lenders will be required to provide you with detailed information about your loan, along with options for troubled borrowers. They must credit your payments promptly and respond quickly to pay-off requests. Lenders holding escrow accounts have new rules for providing reasonable notification before forcing insurance on a borrower, including informing the borrower of the exact cost of force-placed insurance.
Many homeowners have struggled with communication issues with their lenders in the past, with very little recourse. Although the new mortgage servicing rules won’t affect your mortgage borrowing, they will affect your servicing for the lifetime of the loan. Expect fewer problems with chronically late-processed payments and missing statements. You may find new information on your statements, such as how your payment will be applied and how payment options will affect your principal balance. If you have an ARM, your lender is now required to send you a notice 60 days before it adjusts.
It might feel like the new laws as a whole are targeting brokers, but the fact of the matter is that these companies make a living selling mortgages — it makes no difference to their business models if the loans are actually repaid. By forcing everybody to act like a bank when working with customers, borrowers will get a fair shake, no matter if they use a broker or a banker. Reputable brokers should get a boost, too, since they’ll be able to shed some of the negative publicity their slice of the mortgage industry has received almost non-stop since 2006.
All in all, the changes to the mortgage laws we’ll see this year are small, but mighty. By tweaking existing rules and regulations, the Consumer Financial Protection Bureau (CFPB) is setting up our revived real estate market and lending industry for success. Although very reputable lenders have been functioning in the system for decades, it’s sometimes hard for borrowers to tell a good bank from a very bad broker – these new consumer protections are a great start to curing that chronic problem.