This week, the Consumer Financial Protection Bureau's (CFPB) new qualified mortgage (also known as the ability-to-repay) rule went into effect.
The new rule is about helping borrowers understand the true costs of the mortgage they apply for. On the flip side, it is designed to keep lenders from lending money to borrowers who can't afford to make those payments over time.
If it works out the way the CFPB has planned, the number of foreclosures should drop in the coming years, and, hopefully, some of the conditions that helped create one of the biggest real estate bubbles in U.S. history will be eliminated.
To be considered a qualified mortgage, a lender may not charge excessive upfront points and fees (capped at 3 percent of the loan), and the loan cannot be longer than 30 years in length (say goodbye to 40-year mortgages.)
Also, interest-only loans (also known as zero-down payment loans) and negative amortization loans (where the monthly payment doesn't not cover the true cost of the interest, so the total amount of the debt grows each month) will not be considered qualified mortgages.
No-doc loans, also known as stated-income loans because the loan officer would just write down how much the applicant said he or she earned and not verify that information, have been eliminated. Starting this week, if you apply for a mortgage, you have to be able to prove that you can afford to repay it in full.
In addition, the loans must fall into one of three categories: The monthly loan payment plus the borrower's other debt payments cannot exceed 43 percent of the borrower's gross monthly income; the loan must qualify to be purchased or guaranteed by a government-sponsored enterprise (such as Fannie Mae or Freddie Mac) or to be insured or guaranteed by a federal housing agency; otherwise, the loan must be made by a smaller lender that keeps the loan in its portfolio and does not resell it.
As the CFPB website puts it: "The ability-to-repay rule is intended to prevent consumers from getting trapped in mortgages that they cannot afford, and to prevent lenders from making loans that consumers do not have the ability to repay. It's that simple."
So, of course, the nonprofit real estate and mortgage trade associations, which represent the housing industry's interests in Washington, are up in arms. They claim that self-employed individuals, small business owners, and many others will have a harder time qualifying for loans. They also say that loans will cost more.
Perhaps. But while lenders may offer other sorts of nonqualified mortgages (provided they verify that the borrower can repay that loan), if a loan doesn't fall into the qualified mortgage category, it will not receive the same sort of legal protections.
And, after the billions spent to pay off the housing crisis, lenders may be inclined to primarily offer qualified mortgages.