Real estate officials are bracing for new federal mortgage rules intended to press lenders to ensure prospective borrowers are able to repay home loans.
Starting Jan. 10, lenders will be required to scrutinize eight types of financial information about a borrower, including income and debts.
The so-called ability-to-repay and qualified-mortgage requirements stem from the 2010 Dodd-Frank Act. The rules, which were issued by the Consumer Financial Protection Bureau, are designed to prevent the kind of risky loans that contributed to the financial crisis.
The rules are perhaps the largest issue on the real estate industry's mind in the new year. Some real estate officials say one of their biggest worries is that the rules will make it harder for low-in
come and first-time homebuyers to get a mortgage, as well as those in rural areas.
"This definitely affects the lower-income borrower, by far," said Janet Gaglione, president of the Charlotte (N.C.) Regional Mortgage Lenders Association. "We're going to have very strict guidelines. This law is trying to make every lender accountable for every unknown factor that could happen during the term of the loan."
The new rules come as the U.S. housing market starts to recover. Nationwide, builders began work on 780,600 new residential housing units in 2012, up from the housing downturn's low of 554,000 in 2009 -- but below the 1.8 million in 2006, before the crash.
"Housing is really in the mud right now, and home construction is really in the mud right now," said Mark Vitner, economist for Wells Fargo.
Vitner said his greatest concern about the rules is the impact they will have on first-time homebuyers. Home purchases by first-time buyers are experiencing a weaker recovery compared with the upper-end of the housing market, which has posted stronger gains as the stock market has rebounded, he said.
The new mortgage rules could become another drag on the housing market, Vitner said.
"That could be a real speed bump on the road to recovery," he said.
Under the ability-to-repay requirements, lenders have to make "a reasonable, good-faith determination" that a borrower is able to repay a mortgage before a lender provides a loan, according to the Consumer Financial Protection Bureau.
For borrowers, that will mean turning over documentation to show lenders proof of their earnings, a reversal from the housing boom days when some lenders let borrowers simply state their incomes without providing records.
Lenders will also be required to assess a borrower's other financial obligations, such as alimony and child support. A borrower's debt-to-income ratio and credit history must also be considered.
For many borrowers, the changes won't feel all that different, as lenders have changed their practices since the financial crisis.
"Everything's going to have to be documented," said Phil Mahoney, president and CEO of Charlotte-based American Security Mortgage, a midsize lender. "For the general consumer out there, that's no different than it's been the last five or six years."
Lenders can no longer make some types of loans, such as "Alt-A," in which a borrower is allowed to provide little or no financial information before being given a mortgage. But such risky products are less available since the crisis anyway, brokers and lenders say.
Borrowers and lenders will face even more requirements if a lender chooses to make a qualified mortgage, which requires loans to meet three measurements. In one, points and fees cannot exceed 3 percent of the loan amount, although higher percentages are permitted if the loan is below $100,000. In another requirement, a loan term cannot exceed 30 years.
The general category of qualified mortgages also requires a borrower's debt-to-income ratio not to exceed 43 percent. If a qualified mortgage is eligible for purchase by Freddie Mac or Fannie Mae or to be insured by government agencies, the debt-to-income requirement does not apply, under a provision set to run until 2021.
Lenders don't have to make qualified mortgages, but they receive certain legal protections if they do. If a court determines a loan met the qualified-mortgage requirements and also fits within a certain interest-rate threshold, a borrower could not win a lawsuit alleging a lender did not properly calculate their ability to repay, according to the Consumer Financial Protection Bureau.
Worried about legal repercussions, some lenders say they will make only qualified mortgages. Richard Cordray, director of the bureau, has said that the vast majority of loans made in today's market would meet qualified mortgage requirements.
Many lenders and brokers agree pre-crisis lending practices should not return. Yet there are concerns about how the rules will affect certain borrowers.
Vitner of Wells Fargo said first-time homebuyers seeking adjustable-rate mortgages could be especially affected. Under the ability-to-repay rule, when a lender is calculating a borrower's debts the highest interest rate expected over the life of the loan must be factored in.
Vitner said that could make it hard for some first-time borrowers to qualify for adjustable-rate mortgages, which have been a way to make homes affordable for young people just starting in their careers.
Borrowers in regions with lower home prices might face a big effect. Lower loan amounts could make it hard to keep points and fees within limits, industry officials say.
Lenders might not charge underwriting fees as a way to help borrowers meet points and fee thresholds, but they might charge a higher interest rate to compensate, said David Whitley, vice president of Monroe, N.C.-based brokerage Whitley Mortgage.
"It's scary," Whitley said. "The regulations, if they do end up hurting anyone, it'll be the consumer."
When it comes to some aspects of the rules, such as the 43 percent debt-to-income requirement, industry officials say they are unsure of the potential effects.
"What if it's very close to 43 percent?" Mahoney, of American Security Mortgage, said. "I think the lender's going to be hard pressed on how they're going to do that loan."
That borrower might be asked to pay down debt or provide a larger down payment, Mahoney said.
It's also unclear how the rules might affect the recovery of the housing market.
Vitner said he doesn't expect "irreparable harm to the economy" as a result of the rules.
"But we'll probably see some hiccups on the way as we adjust," he said.