Mortgage Rule Change Might Rule Out Buyers

You may have seen reports that the federal government is proposing new mortgage finance rules under which only home purchasers who can afford a minimum 20% down payment on a conventional loan would get a shot at the best interest rates and terms. That's deeply sobering news for large numbers of prospective first-time and moderate-income buyers. But some of the other requirements that federal agencies and the Obama administration are proposing in the same plan could prove just as troublesome:

• Strict mandatory debt-to-income limits. Under the proposal, to get the best mortgage rages, you would need to spend no more than 28% of your gross monthly income on housing-related expenses, and you couldn't have total monthly household debt that exceeds 36% of your income. There would be no flexibility, unlike in today's marketplace, in which Fannie Mae and Freddie Mac consider debt-to-income ratios along with other factors.


• To refinance your existing mortgage and replace it with one carrying the best interest rate, you'd need no less than a 25% equity stake in you house to qualify. If you sought to take any additional cash out through a refi, you would need 30% equity. Today's typical requirements for conventional refi are nowhere near as strict.


• Pristine credit standards. For example, If you were 60 days late on any credit account during the previous 24 months, you would be ineligible for a mortgage at the best terms.

These are all core features of what may be the most sweeping and controversial changes in decades for the housing and mortgage markets. The "qualified residential mortgage" proposals were released in march by banking, securities and housing regulators and the Dept of Housing and Urban Development. The agencies were required by the 2010 financial reform law to come up with new standards for low-risk conventional mortgages.

Under the law, loans that do not meet the strict QRM tests will be pushed into a less-favored, higher cost category: Banks and Wall Street securitizers would need to set aside 5% of loan balances to cover possible losses from defaults. This capital cost inevitably would be passed on to consumers.

Mortgage industry estimates of the interest rate differential between ultra-safe, QRM-qualifying loans and all others range from three quarters of a percentage point to 3 percentage points. In today's market, this would mean that mortgages that meet the federal agencies' stringent new standards might go for 5%. But all others - the vast majority of today's conventional loans - could cost from just under 6% to 7% and higher.

You can muster only a 10% down payment? Tough! Can't fit into the tight confines of the debt-to-income ratio rule?Pay up!

The proposals are out for public comment through June 10 and probably won't be put into effect until mid-2012. The agencies' proposal exempts mortgages sold to Fannie and Freddie from the rule as long as both remain under federal conservatorship. FHA and VA mortgages would not be subject to QRM either.

Builders, consumer groups, banks and others are readying campaigns to persuade the regulators and Obama administration to back off some provisions. Michael Calhoun, president of the Center for Responsible Lending, says the proposal would make it much tougher for modest-income and minority consumers to afford a first home.

Jerry Howard, chief executive of the National Assn. of Home Builders, says the proposals have strayed far beyond Congress' intent, and they threaten to wreck any recovery in housing and force millions of Americans to rent rather than to own.

Note: This article originally published by Kenneth R Harney in the LA Times