Ten Questions on the New Mortgage Rules

by 11 Jan 2013

(WSJ) -- Regulators issued new mortgage rules on Thursday designed to prevent a return to lending practices that cratered the housing market and brought the financial system to its knees during the past decade. Here’s a look at some frequently asked questions:

What is a qualified mortgage? Congress amended federal lending laws in 2010 to give greater legal rights to borrowers who get mortgages they can’t afford. The new law, part of the Dodd-Frank financial-regulation overhaul, said if banks made a qualified mortgage—one that meets certain easy-to-identify criteria—regulators and courts would presume that lenders had reason to assume a borrower could repay.

When do the new rules take effect? In one year.

What is the Consumer Financial Protection Bureau’s role? Congress left it to the agency to spell out the definition of a qualified mortgage.

Do qualified mortgages have a minimum down payment or credit score requirement? No. Instead, the rules focus primarily on documenting a borrower’s ability to make monthly payments.

What kind of loans won’t be qualified mortgages? Certain product types are excluded, including interest-only loans that don’t require principal payments, and loans where the principal balance rises over time. Beyond that, banks must verify a borrower’s income, credit, and employment. Borrowers who take out jumbo mortgages, or those too expensive for government backing, can have no more than 43% of total debt as a share of their pretax income.

Will lending standards get tighter, looser, or stay the same? It’s too soon to tell and there are diverse opinions on this point. David Stevens, the chief executive of the Mortgage Bankers Association, said the debt-to-income requirements for jumbo mortgages could tighten standards for those loans, which have already become much harder to get. “It will restrict credit on the margin over the current environment and that’s something we cannot afford,” he said.

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