If you have been paying attention to the news in the mortgage industry, you may have heard about some of the new mortgage rules and regulations that are set to take effect in 2013. If you are unfamiliar with them, following is a brief explanation:
- The Basel III Agreement calls for higher bank capital standards and are designed to increase regulatory requirements on a lender’s leverage and liquidity.
- The “qualified mortgage” rule refers to a borrower’s ability to repay the loan if it is granted to them. In order to receive a qualified mortgage, the bank must determine that you are reasonably expected to make payments every month. However, there have been no clear guidelines in the new legislation as to what determines a qualified mortgage, so lenders have a safety net built into the regulation which makes it more difficult for borrowers to sue a lender for granting a mortgage to someone who was less than qualified to repay it.
- The “qualified residential mortgage” rule states that banks and lending institutions that approve mortgage-backed securities should hold on to 5 percent of the loan. This rule gives banks more responsibility in determining to whom they decide to loan money to for mortgages. By incorporating the idea of “risk retention,” this will make lenders more hesitant about who can qualify for a mortgage loan.
Analysts are expecting these three new rules to severely limit the number of mortgages that will be given to home buyers when they go into effect in 2013. According to a report by the American Action Forum and quoted in an article in the Wall Street Journal, the new guidelines are expected to increase the costs for borrowing for millions of new home buyers across the country. The credit restrictions are going to increase more so than they already have and fewer people are going to qualify for a mortgage.
Using the lending standards that were prevalent in 2001 as a baseline for “more normal lending standards,” the study by the AAF examined the current regulations and the guidelines that are to be set in place next year. The study found that today’s credit lending standards for mortgage borrowers would decrease the number of loans by between 14 percent and 20 percent in the next three years. This could reduce sales of homes by as much as 13 percent. As a result of the slowed home purchases, there would be a 1.1 percent decrease in the GDP by 2015, which is something that definitely will not help the economy.
While there are few, if any, people arguing that we should go back to the loose standards of 2001 that resulted in the housing crisis in the last decade, some are saying that policymakers should not over-regulate the mortgage industry and make the standards too high for home ownership. Others say that the Dodd-Frank rules would give more protection to consumers without creating stringent rules that would choke the housing market out of new buyers.
Which side of the fence are you on? Do you think the new Dodd-Frank regulations that are set to go into effect will have a positive or a negative impact on the mortgage industry? Should there be some changes to the regulations to make them work better?