Gone are the days of option arms and stated income.
Going forward, the Federal Reserve wants a minimum set of mortgage underwriting standards implemented on most consumer home loans to avoid another housing crisis.
Today, they unveiled the “ability-to-repay requirement,” tied to the Dodd-Frank bill, which can be met in four different ways.
First, a bank or mortgage lender can meet the requirement by considering and verifying eight underwriting factors, including:
– income and assets
– current employment status
– monthly mortgage payment
– monthly payment on any simultaneous mortgage
– monthly payment for mortgage-related obligations
– current debt obligations
– debt-to-income ratio
– credit history
And if it’s an adjustable-rate mortgage, payment must be based on the fully indexed rate, not a start rate or teaser rate.
The second option allows a creditor to originate a so-called “qualified mortgage,” which provides the lender with special protections from liability.
There are currently two definitions of a qualified mortgage, but both wouldn’t allow amortization beyond 30 years, negative amortization, interest-only options, or balloon mortgages.
Additionally, each would limit mortgage points and fees to three percent of the loan amount, while verifying income and assets.
Option three allows a balloon-payment qualified mortgage if the creditor operates in a predominantly rural or underserved area.
Finally, option four allows for the refinancing of a non-standard mortgage into a “standard mortgage,” which has limits on loan fees and doesn’t contain any risky features such as negative amortization or interest-only features.
The proposal also prohibits prepayment penalties unless the mortgage is a prime, fixed-rate qualified mortgage.
All consumer mortgages are covered by these underwriting rules except home equity lines of credit, timeshare plans, reverse mortgages, and temporary loans.
While the rules aren’t yet finalized, it’s going to get a lot more difficult qualifying for a mortgage…