The Consumer Protection ACT and Dodd-Frank Wall Street Reform were administered into a law in 2010 to avoid a return of the housing and financial crisis in 2008, the numbers from that time period wasn’t as significant since the financial system of the Great Depression.
Qualified Mortgage (QM) will start this month, which are new rules initiated in the start of the new year to make loans safer for the consumer according to an article in La Jolla Light.
According to the same article listed above, lenders will be provided legal protection against law suits issued by the borrower. Qualified Mortgage loans will have these different features:
§ During the application procedure, the qualified mortgage limits fees and points charged by the lender to three percent.
§ Balloon loans, negative amortization, interest only and terms beyond 30 years will not be featured anymore
§ The debt-to-income ratio will not increase over 43 percent. Essentially this means any types of loans, i.e. credit cards, auto, student loans and monthly mortgage cannot rise higher than 43 percent of their monthly gross income
“As (interest) rates rise, lenders are going to loosen standards in order to attract customers,” said the chief economist at Zillow Stan Humphries to CBS News. “Adding that the dip in refinancing in recent months means lenders need to find new customers to fill the void.”
The expectations of other experts expressed to CBS News that the new rules of Qualified Mortgages this year will be a lot stricter in the New Year.
“Since there is substantial new liability if they get it wrong, the way banks will protect themselves – all lenders, really – is they will be a little more conservative in their underwriting,” said Bob Davis, Vice President of the American Bankers Association to CBS News.
While other opinions like of senior Vice President of the Independent and Community Bankers Association Ron Haynie feel that, “There will also be some lenders that will make loans that will not be considered QM, but initially they’re going to be extremely cautious. It’s an unknown risk until that ability-to-repay action from the borrower hits the courts, and that won’t happen anytime soon.”
There will be room for movement of lenders to loosen the grip to their standards this year, as the guidelines don’t order loan-to-value ratios and normal acceptable credit histories.