New mortgage rules taking effect next month won't change anything on homeowner's current mortgages and it won't prevent borrowers from taking out home loans with debt-to-income ratios above 43 percent, despite widespread claims to the contrary.
That's according to Richard Cordray, director of the Consumer Financial Protection Bureau, while is implementing the new rules. Cordray addressed what he said were misconceptions about the new "qualified mortgage" (QM) rules in remarks today before a meeting of the Consumer Federation of America.
The new rules are designed to protect consumers against mortgages with so-called "toxic" features than can make them difficult to repay and lead to foreclosure. Loans that meet the new guidelines will be called "qualified mortgages" and will provide lenders with certain liability protections.
Won't ban high LTV mortgages
Cordray addressed what he said were several "myths" about the new rules, including that they would ban mortgages with debt-to-income ratios above 43 percent. Such loans will still be available, he said, perhaps through smaller lenders that set their own guidelines and keep the loans on their own books, as they have always done. Lenders could also use their own judgment to decide if such a loan was a good risk, he said.
Borrowers could also get such loans through Fannie Mae, Freddie Mac, the FHA or VA if they choose to allow mortgages with loan-to-value ratios above 43 percent, he said. Those agencies are not under the control of the CFPB, although it should be noted that federal agencies often seek to align their policies.
Another major misconception, Cordray said, is that the new guidelines will force changes in the mortgages people presently have. The guidelines only apply to new mortgages applied for on or after Jan. 10, 2014.
No down payment restriction
In addition, the new rule does not require lenders to require a certain down payment; that is for lenders themselves to determine, Cordray said. Early discussions about developing a Qualified Mortgage rule did consider requiring a 20 percent down payment for mortgages to qualify under the rule, and smaller down payments were later considered, but that proposal was eventually discarded.
The Qualifed Mortgage guideline is based on what is called an "Ability to Repay" rule, in that mortgages that fit the rule should be free of features that would make a mortgage more difficult to repay than a borrower might have expected.
If a mortgage meets the guideline and the borrower later goes into foreclosure, the lender is protected against getting sued by the borrower for selling them a bad product. That in turn is expected to keep interest rates and other costs for Qualified Mortgages lower than for home loans that do not meet the new guidelines.