Why Banks Are Reluctant To Give Mortgage Loans After The 2008 Recession

Why Banks are Reluctant to Give Mortgage Loans after the 2008 Recession
Ngaji, Terngu Loyola Marymount University April 25, 2013
Why Banks are Reluctant to Give Mortgage Loans After the 2008 Recession
Table of Contents
Abstract....................................................................................................................................... 3 Introduction ................................................................................................................................ 4 The economic conditions for housing and mortgages before the 2008 recession ...................... 5 The reaction of banks after the 2008 recession .......................................................................... 6 The new rules for acquiring mortgage loans .............................................................................. 8 Conclusion .................................................................................................................................. 9 References ................................................................................................................................ 11 Internet links ............................................................................................................................. 12 Appendix I ................................................................................................................................ 13 Appendix II ............................................................................................................................... 14 Appendix III ............................................................................................................................. 18
Abstract This paper unveils some of the reasons why banks and other lending financial institutions are strict in giving out mortgage loans after the 2008 recession in United States. The paper focuses on how financial institutions decisions about loans affect the housing industry and the economy. The study used secondary sources of data to support the conclusions that were drawn. The introduction gave a brief background and the objective of the study. The body of the paper provides details of how the Fed, the Congress, the Federal Housing Administration, the Consumer Finance Protection Bureau, and financial institutions play active roles to restoring the housing and financial industries and the economy. The paper ends with Appendices I through III and are deemed to be helpful in providing details about some information in the work.
Introduction Before the 2008 economic downturn many financial institutions felt comfortable in giving out loans to homebuyers. The requirements needed to get loans were less stringent compared to the post 2008 recession period. For example banks were lending to people with FICO scores less than 590 before the economic downturn. 1 This trend led to a sharp increase in debt financing in the housing industry. As a result the willingness of households to obtain debt financing and acquire homes increased. Since housing and employment are correlated many working individuals remained assured that they would pay off their debts. However, the rise in unemployment, which began in the third quarter of 2007 to 2008, affected many households and resulted to default in mortgage payments. The states, such as California and Nevada, where banks were found of giving huge amounts of loans easily were severely affected. This in turn affected many financial intuitions and the housing industry in the United States. This paper focuses on how banks decisions on giving mortgages affect the housing industry and the economy. The objective of this paper is to examine why financial institutions are reluctant in giving mortgages to homebuyers after the 2008 recession. The Mortgage interest rates in 2013 are below 3.75 percent but why are banks not willing to lend to homebuyers? Why are the Federal Reserve (the Fed), Federal Housing Administration (FHA), the Congress, and banks setting stricter requirements for homebuyers? This paper will answer such questions and will throw more light on the key roles the Fed and the financial institutions play in the housing industry.
According to the Wall Street Journal (2012) many banks gave loans to applicants with FICO scores less than 580 before the recession. The FHA FICO score minimum requirement before the 2008 recession was 580 (Federal Housing Administraton, 2013).
The Economic Conditions for Housing and Mortgages before the 2008 Recession Before the second quarter of 2008 the economic status of United States was at least on the rise but not sufficient enough in the years of 2006 and 2007 to state that there was an increase in the nations wealth as opposed to 2002 and 2003. Of course the construction and manufacturing industries were booming. Investors in the real estate and house builders were hopeful that the positive outcomes in the housing industry will be consistent for a while. Moreover, loans were almost readily available for those who were willing to apply for them, and buy a house, from the banks. Many banks had less strict rules in lending because default rates were low until the third quarter of 2007 through 2008. Figure 1 shows the Federal Deposit Insurance Corporation (FDIC) data on mortgage default rates. Figure 1: The mortgage default (delinquency) trend. 2
In his work, Lounsbury (2010), provided the total delinquent and default rate graph to demonstrate how mortgage defaults were at all-time high in 2008. For more information use this link: http://www.creditwritedowns.com/2010/10/the-alchemy-of-securitization.html.
Throughout 2004 to 2006 financial institutions experienced less mortgage defaults because the unemployment rate (the unemployment rate before 2008 was approximately 4.6 percent) 3 was low and the GDP for the years 2006 to 2007 increased on the average of 2.2 while the cost of living of an average United States citizen was low. 4 With these favorable conditions what led to the dramatic housing default across United States and especially in California? This question may have more than one answer but the two prominent ones are the huge housing leverage (that is, debt financing by the banks) and the large unemployment rate that contributed to the 2008 recession. The Reaction of Banks after the 2008 Recession In the beginning of the year 2000, few manufacturing companies were adopting strategies that will lower their costs of production. Since labor is a variable cost companies moved some jobs outside United States where labor costs were less and this trend noticeably made many United States citizens unemployed and others laid off. 5 The correlation between employment and the ability to make payment on mortgages came into play across United States. In California, for instance, default on mortgage payments started increasing in 2007 alongside with the rate of unemployment. If you notice the default rate began to increase significantly in 2007 in figure 1 on page 4 in accordance with the rising unemployment in figure 2 on page 7. Many financial institutions that gave loans had to foreclose and repossess the houses they issued out mortgages for. In some cases the FHA with the congress required the banks to
This figure was given by the Bureau of Labor Statistics (2007). www.bls.gov/opub/ted/2007. According to the Bureau of Economic Analysis (2008), and the National Bureau of Economic Research (2008), the GDP for 2007 increased by 4.6 percent and the recession peaked on December. For details follow these links: BEA: www.bea.gov/newsreleases/national/gdp/2008; NBER: http://www.nber.org/cycles/dec2008.html. 5 For many authors many companies such as Hewlett-Packard and IBM led the way and adopted off-shoring strategy before the year 2000.
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lower the mortgage interest rates so that some homeowners would be able to continue with their payments (Adelino, Schoar, & Severino, 2012). This applies especially to United States citizens living on fixed incomes after the 2008 recession. Because the Fed, FHA, the congress and the Consumer Financial Protection Bureau (CFPB) instructed banks to reduce mortgage interest rates to encourage consumers to purchase more houses in the market, the Fed required banks to impose strict conditions for lending. Figure 2: The California unemployment rate. 6
Figure 3: The 30-Year Fixed-Rate Mortgage as of April 18, 2013. 7
Source: California Employment Development Department. For details visit http://www.marketoracle.co.uk/Article11503.html and www.edd.ca.gov. 7 As of April 18, 2013, the average mortgage rate in United States was 3.52 (2013). Refer to appendix 1 for the graph of mortgage rates of over two decades in United States for details.
Despite the low 3.62 percent interest rate on mortgages beginning from 2012 as the figure 3 on page 6 depicts, the supply of mortgages is relatively low. This is because banks face huge penalties when there are defaults on mortgage payments. Most of the penalties were set by CFPB and approved by the congress, the Fed and, the President of United States, Barack Obama. The New Rules for Acquiring Mortgage Loans Banks are now requiring homebuyers to put down full payment, two-thirds, or over 20 percent of their payments among other strict requirements. Banks are also sticking to the principle that loan applicants obligations 8 should not exceed 36 percent of the applicants monthly gross income for the applicants to be qualified. Of course, there are exceptions, some home owners are buying homes without making full payments but they must meet the strict rules offered by the banks. If banks believe that some loans will cause them trouble down the road or are more expensive to offer, then the banks will not offer those loans (Bernard, 2009). This is because the Fed, FHA, Congress and the Consumer Financial Protection Bureau have recently come up with a set of rules that banks must follow in supplying loans to homebuyers. Some of the rules offered by the CFPB are listed below. 9 Details of Applicants financial information must be supplied and verified. Borrowers must have sufficient assets or income to pay back the mortgage.
Obligations in this context refer to car loans, mortgage, child support and alimony, credit card bills, student loans, medical debt, and the like. Banks require that the applicants monthly obligations should not exceed 36 percent of the applicants gross monthly income. In addition, the mortgage payments only should not exceed 28 percent of the applicants gross monthly income. According to Bernard (2009), financial advisers recommend reverting to an old standard known as the 28/36 rule. 9 According to CFPB (2013), these rules were given by CFPB to lending financial institutions in United States and were approved by the Congress, the Fed, and the FHA. Refer to appendix II and appendix III for the details of the rules. You may also use these links for details: http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repayfactsheet.pdf and http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-summary.pdf.
For consumers trying to refinance a risky loan, exemptions apply. No excess upfront points and fees for qualified mortgages. No toxic loan features for qualified mortgages. Cap on how much income can go toward debt. No loans with a balloon payment except those made by smaller creditors in rural or underserved areas. Because these rules came at the time when the prospects for the sale of new homes are
high, the banks are also strict in giving out loans. While the Fed and the financial institutions are chiefly concerned with restoring their financial credibility in giving out loans, the CFPB is at the same time focused on protecting consumers from getting irresponsible loans from financial institutions that use the push-strategy and aggressive techniques to supply mortgages to unqualified borrowers. Even though there is ample supply of houses in the market only few homebuyers are willing to purchase them. As a result the inventory of houses keeps piling as no buyers are available. Conclusion The economic downturn in 2008 served as the catalyst for the Fed, the FHA, the Congress, the Consumer Financial Protection Bureau and the financial institutions in United States to come up with measures to revamp the housing and financial industries. Banks are mainly concerned with applicants ability to repay their mortgages. For that reason applicants credit history, monthly gross income and how much cash the mortgage applicants can accumulate for down payment is considered. In early 2012, the FHA new FICO score
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requirement for applicants is 620 minimum.10 In addition, the loan applicants debt-toincome ratio has to be substantially low or below 43 percent. For these reasons, among others, mortgages are harder to get by many potential homebuyers.
10
Federal Housing Administration (2013). http://www.fha.com/fha_article.cfm?id=325.
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References Adelino, M., Schoar, A., & Severino, F. (2012). Credit Supply and House Prices: Evidence from Mortgage Market Segmentation. The National Bureau of Economic Research. Bankrate.com. (2013, April 13). National Mortgage Rates For April 18, 2013. Retrieved from www.bankrate.com: http://www.bankrate.com/finance/mortgages/rate-roundup.aspx Bernard, T. S. (2009, March 20). With Eyes Bigger Than Their Wallets, Homebuyers Are Forced to Revisit Old Rules. The New York Times. Bureau of Economic Analysis. (2008, February 28). Gross Domestic Product: Fouth Quarter 2007 (Preliminary). Retrieved from U.S Department of Commerce: http://www.bea.gov/newsreleases/national/gdp/2008/gdp407p.htm Bureau of Labor Statistics. (2007, April 9). Unemployment Rate. Retrieved from United States Department of Labor: http://www.bls.gov/opub/ted/2007/apr/wk2/art01.htm Consumer Finance Protection Bureau. (2013, January 10). Protecting Consumers From Irresponsible Mortgage Lending. Retrieved from www.onsumerfinance.gov: http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-factsheet.pdf Federal Housing Administraton. (2013). FHA Loan Articles. Retrieved from The Facts About FHA Credit Requirements: http://www.fha.com/fha_article.cfm?id=325 Lounsbury, J. (2010, October 21). Credit Writedowns. Retrieved from The Alchemy of Securitization: http://www.creditwritedowns.com/2010/10/the-alchemy-ofsecuritization.html
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National Bureau of Economic Research. (2008, December 11). Determination of the December 2007 Peak in Economic Activity. Retrieved from Business Cycle Dating Committee, National Bureau of Economic Research: http://www.nber.org/cycles/dec2008.html Wall Street Journal. (2012, October 31). Banks Not Making Getting a Mortgage Easier. Market Watch, p. 1.
Internet Links www.edd.ca.gov www.ecapesomewhere.com www.bankrate.com/finance/mortgages/rate-roundup.aspx www.fha.com/fha_article.cfm?id=325
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Appendix I The 30-Year Fixed mortgage rates over a Period of 38 Years. 11
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Source: www.escapesomewhere.com/rates.html.
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Appendix II
January 10, 2013
PROTECTING CONSUMERS FROM IRRESPONSIBLE MORTGAGE LENDING

When consumers apply for a mortgage, they often struggle to understand how much of a monthly payment they can afford to take on. They may assume that lenders and mortgage brokers will not make loans that people cannot afford. But in the years leading up to the financial crisis, lenders too often made mortgages that could not be paid back. Today the Consumer Financial Protection Bureau (CFPB) is finalizing the Ability-to-Repay rule that requires lenders to obtain and verify information to determine whether a consumer can afford to repay the mortgage. This is one of the signature new rules the CFPB is issuing to meet its goal to help restore trust in the mortgage market. BACKGROUND In the lead up to the financial crisis, certain lending practices set consumers up to fail with mortgages they could not afford. Lenders sold no-doc and low-doc loans where consumers were qualifying for loans beyond their means. Lenders also sold risky and complicated mortgages like interest-only loans, negative-amortization loans where the principal and eventually the monthly payment increases, hybrid adjustable-rate mortgages where the rate was set artificially low for years and then adjusted upwards, and option adjustable-rate mortgages where the consumer could pick a payment which might result in negative amortization and eventually higher monthly payments. The deterioration in underwriting standards contributed to dramatic increases in mortgage delinquencies and rates of foreclosures. What followed was the collapse of the housing market in 2008, and the subsequent financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act recognized the need to mandate that lenders ensure consumers have the ability to pay back their mortgages. Under the law, responsibility for drafting the Ability-to-Repay rule initially fell to the Board of Governors of the Federal Reserve System. Then, the CFPB took over responsibility in July 2011. The Act also provides the CFPB the authority to define criteria for certain loans called Qualified Mortgages that are presumed to meet the Ability-to-Repay rule requirements. The CFPB conducted extensive research and analysis. In May 2012, the CFPB sought public comment on new data and information. Through meetings with stakeholders on all sides, and rigorous analysis and research, the CFPB has come up with todays rule. The Ability-to-Repay rule protects consumers from risky practices that helped cause the crisis. It helps ensure that responsible consumers get responsible loans. And it helps ensure that lenders can extend credit responsibly without worrying about competition from unscrupulous lenders.
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ABILITY TO REPAY Under the new Ability-to-Repay rule, lenders will have to determine the consumers ability to pay back both the principal and the interest over the long term not just during an introductory period when the rate may be lower. Lenders can no longer offer no-doc, low-doc loans, otherwise known as Alt-A loans, where some lenders made quick sales by not requiring documentation, then offloaded these risky mortgages by selling them to investors. Financial information has to be supplied and verified: Lenders must look at a consumers financial records and verify them. At a minimum, a lender must consider eight underwriting standards: o Current income or assets; o Current employment status; o Credit history; o The monthly payment for the mortgage; o The monthly payments on any other loans associated with the property; o The monthly payment for other mortgage related obligations (such as property taxes); o Other debt obligations; and o The monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage. (Debt-to-income ratio is a consumers total monthly debt divided by their total monthly gross income). A borrower has to have sufficient assets or income to pay back the mortgage: Lenders must make the determination the borrower can repay the loan by looking at the borrowers income and any assets they have on hand. Teaser rates can no longer mask the true cost of a mortgage: Lenders cant base their evaluation of a consumers ability to repay the loan on teaser rates. Lenders will have to determine the consumers ability to repay both the principal and the interest over the long term. For consumers trying to refinance a risky loan, exemptions apply: Creditors refinancing a borrower from a risky mortgage such as an adjustable-rate mortgage, an interest-only loan, or a negativeamortization loan to a more stable, standard loan can do so without undertaking the full underwriting process required by the new rules.
QUALIFIED MORTGAGES Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue Qualified Mortgages. Qualified Mortgages must meet certain requirements which prohibit or limit the risky features that harmed consumers in the recent mortgage crisis. Features of Qualified Mortgages: No excess upfront points and fees: A Qualified Mortgage limits points and fees including those used to compensate loan originators, such as loan officers and brokers. When lenders tack on excessive points and fees to the origination costs, consumers end up paying a lot more than planned. No toxic loan features: Qualified Mortgages cant have the loan features that were associated with risky mortgages in the lead up to the crisis. Certain loans cannot be Qualified Mortgages:
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o o o
No interest-only loans, which are when a consumer only pays the interest for a specified amount of time so the principal does not decrease with payments; No loans where the principal amount increases, such as a negative-amortization loan; and No loans where the term is longer than 30 years.
Cap on how much income can go toward debt: Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This cap on debt ensures consumers are only getting what they can likely afford. Before the crisis, many consumers took on mortgages that raised their debt levels so high that it was nearly impossible for them to repay the loan considering all their financial obligations. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards such as that they are eligible for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) will be considered Qualified Mortgages. No loans with a balloon payment except those made by smaller creditors in rural or underserved areas: The law generally prohibits loans with balloon payments from being Qualified Mortgages. Balloon-payment loans require a larger-than-usual payment at the end of the loan term. A small creditor operating in rural or underserved areas is permitted to originate such loans as Qualified Mortgages under certain defined circumstances.
Types of Qualified Mortgages: Qualified Mortgages with rebuttable presumption: These are higher-priced loans typically for consumers with insufficient or weak credit history. If the loan goes south, the consumer can rebut the presumption that the creditor properly took into account their ability to repay the loan. They would have to prove the creditor did not consider their living expenses after their mortgage and other debts. This does not affect the rights of a consumer to challenge a lender for violating any other federal consumer protection laws. Qualified Mortgages with safe harbor: These are lower-priced loans that are typically made to borrowers who pose fewer risks. If the loan goes south, the lender will be considered to have legally satisfied the ability-to-repay requirements. But consumers can still legally challenge their lender under this rule if they believe that the loan does not meet the definition of a Qualified Mortgage. This does not affect the rights of a consumer to challenge a lender for violating any other federal consumer protection laws.
PROPOSED ABILITY-TO-REPAY AMENDMENTS Today, the CFPB is also inviting comment on proposed amendments to its Ability-to-Repay rule that include: Exemptions for nonprofit creditors that work to help low- to moderate-income consumers obtain affordable housing; Exemptions for housing finance agencies and lenders participating in housing finance agency programs intended to foster community development; Exemptions for homeownership stabilization programs that work to prevent foreclosures, such as programs operating in conjunction with the Making Home Affordable program;
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A provision to give Qualified Mortgage status to small creditors, such as community banks and credit unions that make and hold loans in their own portfolios.
As part of this proposal, the CFPB is also seeking comment on how best to calculate the loan origination compensation that will be part of the limitation on points and fees for Qualified Mortgages.
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Appendix III
SUMMARY OF THE ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE AND THE CONCURRENT PROPOSAL The Consumer Financial Protection Bureau (Bureau) is issuing a final rule to implement laws requiring mortgage lenders to consider consumers ability to repay home loans before extending them credit. The rule will take effect on January 10, 2014. The Bureau is also releasing a proposal to seek comment on whether to adjust the final rule for certain community-based lenders, housing stabilization programs, certain refinancing programs of the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the GSEs) and Federal agencies, and small portfolio creditors. The Bureau expects to finalize the concurrent proposal this spring so that affected creditors can prepare for the January 2014 effective date. Background During the years preceding the mortgage crisis, too many mortgages were made to consumers without regard to the consumers ability to repay the loans. Loose underwriting practices by some creditorsincluding failure to verify the consumers income or debts and qualifying consumers for mortgages based on teaser interest rates that would cause monthly payments to jump to unaffordable levels after the first few yearscontributed to a mortgage crisis that led to the nations most serious recession since the Great Depression. In response to this crisis, in 2008 the Federal Reserve Board (Board) adopted a rule under the Truth in Lending Act which prohibits creditors from making higher-price mortgage loans without assessing consumers ability to repay the loans. Under the Boards rule, a creditor is presumed to have complied with the ability-to-repay requirement if the creditor follows certain specified underwriting practices. This rule has been in effect since October 2009.
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In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required that for residential mortgages, creditors must make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms. Congress also established a presumption of compliance for a certain category of mortgages, called qualified mortgages. These provisions are similar, but not identical to, the Boards 2008 rule and cover the entire mortgage market rather than simply higher-priced mortgages. The Board proposed a rule to implement the new statutory requirements before authority passed to the Bureau to finalize the rule. Summary of Final Rule The final rule contains the following key elements: Ability-to-Repay Determinations. The final rule describes certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Creditors must generally use reasonably reliable thirdparty records to verify the information they use to evaluate the factors. The rule provides guidance as to the application of these factors under the statute. For example, monthly payments must generally be calculated by assuming that the loan is repaid in substantially equal monthly payments during its term. For adjustable-rate mortgages, the monthly payment must be calculated using the fully indexed rate or an introductory rate,
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whichever is higher. Special payment calculation rules apply for loans with balloon payments, interest-only payments, or negative amortization. The final rule also provides special rules to encourage creditors to refinance nonstandard mortgageswhich include various types of mortgages which can lead to payment shock that can result in defaultinto standard mortgages with fixed rates for at least five years that reduce consumers monthly payments. Presumption for Qualified Mortgages. The Dodd-Frank Act provides that qualified mortgages are entitled to a presumption that the creditor making the loan satisfied the ability-torepay requirements. However, the Act did not specify whether the presumption of compliance is conclusive (i.e., creates a safe harbor) or is rebuttable. The final rule provides a safe harbor for loans that satisfy the definition of a qualified mortgage and are not higher-priced, as generally defined by the Boards 2008 rule. The final rule provides a rebuttable presumption for higherpriced mortgage loans, as described further below. The line the Bureau is drawing is one that has long been recognized as a rule of thumb to separate prime loans from subprime loans. Indeed, under the existing regulations that were adopted by the Board in 2008, only higher-priced mortgage loans are subject to an ability-torepay requirement and a rebuttable presumption of compliance if creditors follow certain requirements. The new rule strengthens the requirements needed to qualify for a rebuttable presumption for subprime loans and defines with more particularity the grounds for rebutting the presumption. Specifically, the final rule provides that consumers may show a violation with regard to a subprime qualified mortgage by showing that, at the time the loan was originated, the consumers income and debt obligations left insufficient residual income or assets to meet living expenses. The analysis would consider the consumers monthly payments on the loan, loan-
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related obligations, and any simultaneous loans of which the creditor was aware, as well as any recurring, material living expenses of which the creditor was aware. Guidance accompanying the rule notes that the longer the period of time that the consumer has demonstrated actual ability to repay the loan by making timely payments, without modification or accommodation, after consummation or, for an adjustable-rate mortgage, after recast, the less likely the consumer will be able to rebut the presumption based on insufficient residual income. With respect to prime loanswhich are not currently covered by the Boards ability-torepay rulethe final rule applies the new ability-to-repay requirement but creates a strong presumption for those prime loans that constitute qualified mortgages. Thus, if a prime loan satisfies the qualified mortgage criteria described below, it will be conclusively presumed that the creditor made a good faith and reasonable determination of the consumers ability to repay. General Requirements for Qualified Mortgages. The Dodd-Frank Act sets certain product-feature prerequisites and affordability underwriting requirements for qualified mortgages and vests discretion in the Bureau to decide whether additional underwriting or other requirements should apply. The final rule implements the statutory criteria, which generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages. So-called no-doc loans where the creditor does not verify income or assets also cannot be qualified mortgages. Finally, a loan generally cannot be a qualified mortgage if the points and fees paid by the consumer exceed three percent of the total loan amount, although certain bona fide discount points are excluded for prime loans. The rule provides guidance on the calculation of points and fees and thresholds for smaller loans.
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The final rule also establishes general underwriting criteria for qualified mortgages. Most importantly, the general rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total (or back-end) debt-to-income ratio that is less than or equal to 43 percent. The appendix to the rule details the calculation of debt-to-income for these purposes, drawing upon Federal Housing Administration guidelines for such calculations. The Bureau believes that these criteria will protect consumers by ensuring that creditors use a set of underwriting requirements that generally safeguard affordability. At the same time, these criteria provide bright lines for creditors who want to make qualified mortgages. The Bureau also believes that there are many instances in which individual consumers can afford a debt-to-income ratio above 43 percent based on their particular circumstances, but that such loans are better evaluated on an individual basis under the ability-to-repay criteria rather than with a blanket presumption. In light of the fragile state of the mortgage market as a result of the recent mortgage crisis, however, the Bureau is concerned that creditors may initially be reluctant to make loans that are not qualified mortgages, even though they are responsibly underwritten. The final rule therefore provides for a second, temporary category of qualified mortgages that have more flexible underwriting requirements so long as they satisfy the general product feature prerequisites for a qualified mortgage and also satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by either (1) the GSEs while they operate under Federal conservatorship or receivership; or (2) the U.S. Department of Housing and Urban Development, Department of Veterans Affairs, or Department of Agriculture or Rural Housing Service. This temporary provision will phase out
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over time as the various Federal agencies issue their own qualified mortgage rules and if GSE conservatorship ends, and in any event after seven years. Rural Balloon-Payment Qualified Mortgages. The final rule also implements a special provision in the Dodd-Frank Act that would treat certain balloon-payment loans as qualified mortgages if they are originated and held in portfolio by small creditors operating predominantly in rural or underserved areas. This provision is designed to assure credit availability in rural areas, where some creditors may only offer balloon-payment mortgages. Loans are only eligible if they have a term of at least five years, a fixed-interest rate, and meet certain basic underwriting standards; debt-to-income ratios must be considered but are not subject to the 43 percent general requirement. Creditors are only eligible to make rural balloon-payment qualified mortgages if they originate at least 50 percent of their first-lien mortgages in counties that are rural or underserved, have less than $2 billion in assets, and (along with their affiliates) originate no more than 500 first-lien mortgages per year. The Bureau will designate a list of rural and underserved counties each year, and has defined coverage more broadly than originally had been proposed. Creditors must generally hold the loans on their portfolios for three years in order to maintain their qualified mortgage status. Other Final Rule Provisions. The final rule also implements Dodd-Frank Act provisions that generally prohibit prepayment penalties except for certain fixed-rate, qualified mortgages where the penalties satisfy certain restrictions and the creditor has offered the consumer an alternative loan without such penalties. To match with certain statutory changes, the final rule also lengthens to three years the time creditors must retain records that evidence compliance with the ability-to-repay and prepayment penalty provisions and prohibits evasion of the rule by
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structuring a closed-end extension of credit that does not meet the definition of open-end credit as an open-end plan. Summary of Concurrent Proposal The concurrent proposal seeks comment on whether the general ability-to-repay and qualified mortgage rule should be modified to address potential adverse consequences on certain narrowly-defined categories of lending programs. Because those measures were not proposed by the Board originally, the Bureau believes additional public input would be helpful. Specifically, the proposal seeks comment on whether it would be appropriate to exempt designated non-profit lenders, homeownership stabilization programs, and certain Federal agency and GSE refinancing programs from the ability-to-repay requirements because they are subject to their own specialized underwriting criteria. The proposal also seeks comment on whether to create a new category of qualified mortgages, similar to the one for rural balloon-payment loans, for loans without balloon-payment features that are originated and held on portfolio by small creditors. The new category would not be limited to lenders that operate predominantly in rural or underserved areas, but would use the same general size thresholds and other criteria as the rural balloon-payment rules. The proposal also seeks comment on whether to increase the threshold separating safe harbor and rebuttable presumption qualified mortgages for both rural balloon-payment qualified mortgages and the new small portfolio qualified mortgages, in light of the fact that small creditors often have higher costs of funds than larger creditors. Specifically, the Bureau is proposing a threshold of 3.5 percentage points above APOR for first-lien loans.

Why Banks Are Reluctant To Give Mortgage Loans After The 2008 Recession

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Why Banks Are Reluctant To Give Mortgage Loans After The 2008 Recession

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Why Banks are Reluctant to Give Mortgage Loans after the 2008 Recession

Ngaji, Terngu Loyola Marymount University April 25, 2013

Figure 3: The 30-Year Fixed-Rate Mortgage as of April 18, 2013. 7

Federal Housing Administration (2013). http://www.fha.com/fha_article.cfm?id=325.

Internet Links www.edd.ca.gov www.ecapesomewhere.com www.bankrate.com/finance/mortgages/rate-roundup.aspx www.fha.com/fha_article.cfm?id=325

Appendix I The 30-Year Fixed mortgage rates over a Period of 38 Years. 11

January 10, 2013

PROTECTING CONSUMERS FROM IRRESPONSIBLE MORTGAGE LENDING

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