WASHINGTON -- Six years after the housing meltdown exposed fissures in the system, new mortgage rules that took effect at the end of last week stand to remodel the market.
Housing groups worry that changes meant to shield Americans from abusive lending practices that contributed to the financial crisis will make it harder for many to buy homes. But experts say the rules will create sustainable homeownership by ensuring that borrowers can afford to repay their home loans.
"The rules may cut some credit [availability] at the margins, but as a whole they will ensure that borrowers have a product they can afford," said Sam Khater, deputy chief economist at the housing data provider CoreLogic. "The terms of the debate are always about access to credit, but it's also about access to sustainable homeownership."
The reforms written by the Consumer Financial Protection Bureau aim to protect Americans in the process of buying a home and if they run into trouble paying their mortgages.
In prepared remarks for a field hearing in Phoenix last Friday, CFPB Director Richard Cordray said the bureau is taking a "back to basics approach to mortgage lending practices. No debt traps. No surprises. No runarounds."
Lenders will have to verify borrowers' income, assets and debt before signing them up for home loans. Such common-sense practices anchored the mortgage market for decades but were cast aside in the lead-up to the meltdown as banks relaxed standards to churn out more lucrative loans.
In response, the CFPB has created a category of home loans that offer lenders broad legal protections against borrower lawsuits, provided they adhere to certain criteria. These "qualified mortgages" limit upfront fees and bar risky features such as no-interest periods that can leave homeowners stuck with unsustainable loans. The loans are available to consumers who have a debt burden that is no more than 43 percent of income.
In real estate markets such as Washington, where prices are high, prospective buyers could run up against the limit as they stretch their finances to buy homes. But some of the nation's largest banks, including Wells Fargo, have said they will offer loans for high-priced homes that do not conform to the new standard.
David Stevens, chief executive of the Mortgage Bankers Association, is concerned that lower-income borrowers, who would fall outside the debt-to-income ratio requirements, will not fare as well as wealthier consumers.
"We're seeing institutions building business models to take advantage of that side of the market, charging 8 percent to 9 percent interest rates," he said. "We need clear consumer protections but nobody wants to push middle-class families on the margins into a shadow industry of high-priced mortgages."
In the year since the CFPB finalized the mortgage rules, the bureau has made tweaks for a smoother implementation. Stevens said he wants the bureau to relax the debt-to-income ratio, which he said may be unnecessary because regulators have eliminated risky loan features.
Lenders are under no obligation to issue only qualified mortgages; they just have to verify that borrowers have the ability to make their loan payments. However, banks, which have doled out billions in recent years to settle lawsuits related to mortgage abuses, are likely to gravitate toward the protections afforded under the new loan category, analysts said.
The qualified mortgage rule is part of a broader collection of reforms that include changes to the way borrowers interact with mortgage servicers. These firms that collect mortgage payments were criticized for mishandling borrowers' requests for lower principle or interest payments during the meltdown.
Now, mortgage servicers will have to maintain accurate records, offer ongoing access to staff members and provide options for delinquent homeowners to avoid foreclosure or face enforcement from regulators.
"It may seem silly that we need rules to tell servicers to answer the phone; not to lose people's paperwork; to tell borrowers how much they owe," Cordray said. "But we have lived through the financial crisis. We have seen with our own eyes the grave dysfunctions in the mortgage market."
It is possible that the average borrower will not feel a major impact from the new rules, because lenders have become more conservative since the crisis, said Ghazale Johnston, managing director of Accenture Credit Services.
"In the last few years, a lot of these lenders have spent time strengthening their underwriting requirements and putting in place tighter internal controls," she said. "The impact of that has been higher-quality loans being originated. The steps banks have taken to eliminate the risks have inadvertently helped them prepare for the rules."