You remember the housing market meltdown a few years back, along with the ensuing taxpayer-funded bailout of large lending institutions. Well, in an effort to regulate the lending industry and protect the consumer/taxpayer, Congress established the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). And many of its more ambitious new regulations will go into effect January 1, 2014.
The irony? Those changes may make it much more difficult for you to get a mortgage.
"Under the new rules, if [banks] want to lend correctly, by the book, they're going to [have to] leave out a lot of borrowers who would otherwise qualify today for a mortgage," says Jacob Gaffney, executive editor of HousingWire.com and HW Magazine, a financial publication covering the housing and mortgage industry.
In fact, according to a Housingwire blog post written by Marcus McCue, executive vice president at Guardian Mortgage in June 2013, 48 percent of borrowers who could get a mortgage through his bank today will not qualify after 2014.
So if you think you might be one of those in the 48 percent, you may want to read on and see why you should refinance now - before those new, stricter rules go into effect January 2014.
Reason #1: The Creation of the Consumer Financial Protection Bureau
Probably the one thing that the Dodd-Frank Act did that will most affect how and to whom banks lend money is create the Consumer Financial Protection Bureau, says Gaffney. Legislation for the instatement of the CFPB was passed in 2010 with the Dodd-Frank Act, and the bureau came into operation in July 2011. Ostensibly set up to protect consumers from taking out mortgages that are beyond their ability to pay back, this is the entity that will be watching more closely over the lending institutions starting in 2014 - which is when the new Dodd-Frank reform becomes effective.
And Gaffney says that from the looks of things, the CFPB will likely be a pit bull. But isn't consumer protection a good thing? Yes, and no, says Gaffney.
"Any company out there, especially the larger banks that have business operations outside of mortgages, are going to dwindle their mortgage operations because [the mortgage operations are] just too risky," he says. And with fewer large lenders, he sees fewer mortgages being offered. Hence, it might get tougher to get a mortgage for anyone who's on the bubble of qualifying.
Reason #2: There Will Need to Be Fewer Foreclosures in the Future
Gaffney says one of the biggest results of the new Dodd-Frank Act and the creation of the CFPB will be the increasing difficulty lenders will have when it comes to foreclosing on mortgage-holders who stop making payments.
And on the surface that might sound like a good thing.
But the downside is that lenders might get a lot more choosey when it comes to whom they'll give mortgages, says Gaffney. Why? Because if they give a mortgage to the wrong borrower, it could mean a long and costly road ahead if the borrower forecloses on their home.
"For every foreclosure, lenders will have to show the CFPB that there was absolutely no way they could do anything else," says Gaffney. He says that includes offering delinquent mortgage-holders many less-severe options. Those options include refinancing, short sale solutions (in which the lender might agree to less than the full amount owed), cash for keys (in which lenders pay delinquent homeowners to hand over keys and vacate the property), and other options.
That's a potentially very costly process for lenders, says Gaffney, and - surprise, surprise - banks don't like costly processes. So again, qualifying for a mortgage can only get tougher.
Reason #3: Tighter "Ability to Pay" Rules
You could argue that the lax qualifying practices of many lenders and big banks helped to create the financial crisis of 2008 - and got some homeowners into mortgages they couldn't afford. And while that is of course a bad thing, Gaffney says the new CFPB rules that will go into effect in January might overcorrect and result in some people not being able to qualify for a mortgage, even though they should qualify.That's because come 2014, lenders will not have the latitude they've had in the past when evaluating what is called the "ability to pay" of the borrower.
In fact, the new rules force lenders to look at a minimum of eight underwriting factors, including:
- Current or reasonably expected income or assets
- Current employment status
- Monthly mortgage payment
- Monthly payments on other loans
- Current debt obligations, alimony, and child support
- Monthly payment for mortgage-related obligations
- Monthly debt-to-income ratio or residual income
- Credit history
Gaffney says that these requirements will force banks to be stricter than they otherwise might. In fact, he points out that the CFPB has even set specific limits on some of these. One of the most important for consumers to understand is the monthly debt-to-income ratio limit, which will be set at a maximum of 43 percent come January 2014.
Reason #4: Lawsuits Could Be on the Rise
Lawsuits are not only a bummer, they are very costly. And Gaffney says lenders are currently nervous that 2014 might see them in the legal crosshairs. And that will force them to be much more selective about whom they give mortgages.
"2014 will be the big year, because the CFPB will need to prove it is an effective regulator and it will manifest itself in many enforcement actions. So I think [lenders] are well aware that's going to happen," says Gaffney.
Adding to the tension is the appointment of Richard Cordray as the first director of the CFPB. Cordray is the former Attorney General of Ohio, where Gaffrey says he was extremely aggressive in fighting for consumers, and protecting them from fraudulent foreclosures and financial predators.
Gaffrey commends Cordray for his good work on behalf of victimized consumers, but also says that Cordray's impressive record is exactly what is giving lenders pause about giving out as many loans next year.
What this all means is that qualifying for a mortgage might mean clearing higher and higher bars than you would have to right now.