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Thursday, August 7, 2014

Is it Harder or Easier to Get New Mortgage Now?

Written by  on Monday, 06 January 2014 8:44 am
The number of homes purchased with a home loan has been dropping steadily since May, according to RealtyTrac. Instead, cash is king for many reasons. As mortgage rates began creeping up, some homebuyers started opting to purchase with all cash. And that trend may continue as new loan requirements become more strict.
However, for those buyers who do need to purchase a home with a loan, expect to see some changes in the loan requirements as the new year rings in. Here are a just a few of the changes that are going into effect in January 2014. Some of these requirements are already in place by lenders.
The new guidelines are being implemented under The Consumer Financial Protection Bureau's Qualified Mortgage (QM) and are designed to help avoid the borrowing catastrophes that caused the housing crisis. The guidelines are what the lenders use to prove borrowers' ability to repay a loan.
One of the guidelines’ requirements is that borrowers must have a maximum debt-to-income ratio of 43 percent. Debt-to-income ratios have already been in place but the new rules won't allow for any compensating circumstances. That means that not even a significant downpayment or a large cash reserve will be allowed to offset a higher debt ratio.
The incentive to follow these guidelines is huge for the lender. If the mortgages don't meet the QM guidelines, the lender will be required to hold the loan as opposed to selling it to Fannie Mae and Freddie Mac.
The QM requirements potentially may have lower loan limits for conventional conforming loans. The agency that regulates Fannie Mae and Freddie Mac, The Federal Housing Finance Agency, will delay its normal adjustment of loan limits from January 1, 2014 to sometime later in the year. The agency is trying to see what kind of impact the new QM guidelines will have on the housing industry. For most housing markets, the current limits are $417,000 and up to $625,000 in high-cost areas. How these figures will change remains to be seen in 2014.
Origination fees will be limited under the QM requirements, which could make getting a smaller loan more difficult. Origination loan fees will be limited to no more than 3 percent of the loan amount. This could make mortgage lenders less likely to offer smaller loan amounts because they may not always be able to recoup their costs and make a profit.
Self-employed borrowers already face tough standards and they'll likely be even more strict in 2014. In the QM guidelines, all borrowers must prove there is sufficient cash flow to make payments on their loan but self-employed borrowers' incomes typically fluctuate. These borrowers frequently have cash reserves that they rely on to pay bills when their income is off in a particular month. However, even if there is a large amount of money in reserve, it may still be difficult for the self-employed borrower to get a loan approved due to this new "ability-to-repay" QM guideline.
Expect to see changes in the loan approval process as the new year begins. However, some of the specific requirements may not be determined until later in 2014.

Reader Alert – New Truth in Lending Rules Are Shadowed in Doubt

On January 17, 2013, the Consumer Financial Protection Bureau (CFPB) published its new Final Rule, amending Regulation Z, the implementing regulation of the Truth in Lending Act (TILA).  The new Regulation Z becomes effective on January 10, 2014.  It adds certain protections for customers, but also adds interesting and worthwhile protections for lenders and mortgage originators.

However, a recent decision in the United States Court of Appeals for the District of Columbia Circuit has called into question whether this and other actions of the CFPB have any validity at all.

The CFPB acquired general rulemaking authority for TILA (and many other federal consumer protection statutes) in July 2011, pursuant to the Dodd­Frank Wall Street Reform and Consumer Protection Act of 2010, 12 U.S.C. § 5519 (Dodd­Frank).

Although the  CFPB already published an interim final rule in December 2011, that rule did not impose any new substantive obligations, and only made technical and conforming changes to reflect the transfer of authority to CFPB.

The Final Rule issued in January does make substantive changes, based on the Dodd­Frank amendments to TILA, including specific protections for lenders and mortgage originators.  The Final Rule provides at 12 C.F.R. § 1026.43(c) for certain repayment ability  requirements in the origination of loans.  But it also provides, at 12 C.F.R. § 1026.43(e)(1), for a safe harbor from ability­ to ­repay  challenges for the least risky type of "qualified mortgages," while also providing a rebuttable presumption of validity for a separate
tier of qualified mortgages whose pricing is indicative of a higher level of risk.

 A qualified mortgage can very roughly be defined as a typical fixed­rate mortgage loan not exceeding a 30­year term, issued with limited points, which is either insurable by a Government
­Sponsored Entity, or as to which other verification requirements apply, and which under certain circumstances may provide for a  balloon payment.  12 C.F.R. §§ 1026 (e)(2) & (4), & (f).

The safe harbor provision is expected to provide an important defense to
challenges that a mortgage loan was made without ability to repay it.

However, a recent Court decision has cast significant doubt on whether anything the CFPB has done in the last year, including  issuance of this Final Rule, is valid.  On January 25, 2013, the District of Columbia Circuit Court decided the case of Canning v.
National Labor Relations Board, No. 12­1115 (D.C. Cir. Jan. 25, 2003), which reviewed a decision of the National Labor Relations Board (NLRB), Noel Canning, a Division of the Noel Corp., 358 N.L.R.B. No. 4, 2012 WL 402322 (Feb. 8, 2012).

 In this decision, the Court of Appeals held that the NLRB could not lawfully act at all, because it did not have a quorum when it did so.
That was because three of its five Board members' appointments were invalid under the Recess Appointments Clause of the Constitution, Article II, Section 2, Clause 3.  The Court held that President Obama had not actually appointed them during a "recess" as contemplated by the Constitution.

This decision is relevant because, like the NLRB board members, the director of the CFPB, Richard Cordray, was appointed by President Obama under such circumstances on January 4, 2012.  A case already is pending, in fact, in the United States District Court, District of Columbia, called State National Bank of Big Spring et al. v. Wolin et al., No. 12­1032, which among other things challenges
the authority of Mr. Cordray on these grounds.  

Notably, the Canning NLRB decision is binding on the lower court in this case,
assuming there are no other jurisdictional, standing or other grounds on which the plaintiffs' case in Wolin first fails.

Given recent events, on March 12, 2013, a Senate Committee is also expected (as of this writing) to consider  what authority Mr. Cordray actually has.

Finally, it is noteworthy that the Canning decision also explicitly disagreed with a 2004 decision of the Eleventh Circuit, Evans v. Stephens, 387 F.3d 1220, 1224 (11th Cir. 2004), cert. denied, 544 U.S. 942 (2005), which had held a similar "recess" appointment valid.

This means that there is now a split of Circuit authority on an important Constitutional issue, so review by the United States  Supreme Court is quite possible.  It remains to be seen whether the issue will be resolved prior to the January 2014 effective date of
the CFPB's new Regulation Z.

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