“Homeowners and buyers who are sitting on the sidelines should get moving today unless they want to get blindsided by the impact of a new law,” said Gibran Nicholas, Chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers. “The massive financial reform law that just passed Congress has two main components that could very negatively impact homeowners and homebuyers in the future.”
Harder to qualify for a mortgage
“The new law dictates certain guidelines that lenders must follow when making loans,” Nicholas said. “Some of these guidelines are simply a copy of the current situation. However, now that the guidelines are built into law, lenders will find it even more difficult to loosen their guidelines once the economy and housing market improves.” For example, consider a business owner with a very high 750 credit score, plenty of equity in their home, no history of late payments, and plenty of cash in the bank. If this responsible homeowner experienced a loss in their business last year, they may be prevented from qualifying for a home mortgage under the new law because of the temporary decline in income from their business. The new law requires lenders to document a borrower’s income, but it does not specifically state the terms under which loans can be made. “Regulators may address this ambiguity when writing the regulations implementing the law,” Nicholas said. “However, if they don’t, many lenders will be tempted to tighten their guidelines even further in order to err on the side of caution and stay in compliance with the new law.”
Higher mortgage rates
“There are two sections of the law that will cause mortgage rates to increase in the future,” Nicholas said. “The new law requires lenders to keep a 5% stake in the mortgages that they originate unless the loans meet a certain criteria. This means that lenders won’t be able to offload some of the higher risk associated with these loans, and interest rates on these types of loans will go up.” For example, homeowners who have had financial or credit challenges due to divorce or bankruptcy, business owners with fluctuating income, and other homeowners and buyers who fall “outside the box” may need to pay higher rates on their home loans in the future. “Also, the future of Fannie Mae and Freddie Mac remains uncertain,” Nicholas said. “The market doesn’t like uncertainty, and mortgage rates could go a lot higher in the future depending on when and how the issue of Fannie and Freddie is resolved.”
“To be clear, there are a few positive elements to the bill,” Nicholas said. “These include consumer protections involving pre-payment penalties and loans originated in states that have laws that prohibit lenders from pursuing judgments against homeowners who owe more than the value of their homes. However, the main takeaway for homeowners and buyers is that is that mortgage rates are currently very low, and lending guidelines are not as bad as they could be once the new law goes into effect. This means that if you can qualify for a mortgage now, you should do so, and not gamble your homeownership goals on the future impact of the new law.”
About CMPS Institute: CMPS is a training, examination, certification and ongoing membership program for mortgage professionals. Recognized for its preeminence within the industry, the CMPS curriculum goes above and beyond the minimal licensing requirements, and represents the core knowledge expected of residential mortgage professionals.
Written by Gibran Nicholas