This is the sixth installment of HSH.com’s Think Tank series which features in-depth questions and answers from the nation’s top real estate professors and professionals.
Since new regulations will shape the mortgage market in 2014, we wanted to explore what the impact will be on mortgage rates, mortgage lenders and consumers in what is expected to be a more restrictive lending environment. Specifically, the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage Rule (QM) that took effect on Jan. 10, 2014, requires mortgage lenders to fully consider the consumer’s “ability to repay home loans before extending them credit.”
We asked professor Robert S. Sichel, J.D., L.L.M., professor of business law at Kennesaw State University, professor Kemberley Washington, CPA, professor of accounting at Dillard University, and Dr. Ken H. Johnson, Ph.D., faculty director at the Tibor and Shelia Hollo School of Real Estate how the CFPB’s QM rule will affect homeowners and borrowers in 2014. Will these new regulations ultimately protect the consumer?
A: The new Qualified Mortgage (QM) rules should not have any substantial impact on the lending business other than adding another layer of paperwork to an already cumbersome process of closing a mortgage loan. The more stringent underwriting and documentation criteria outlined in the QM rules have already been implemented, for the most part. So overall, the QM rules may very well make it easier to obtain a mortgage loan because of the certainty lenders now have that a loan will be appropriate for the borrower.
A: I actually think it helps lenders, since there are regulations in place to reduce the likelihood a loan will go into default. Many lenders have put these types of protocols in action since the financial crisis, so they are already in compliance. Self-employed individuals, however, may have to do more work to prove their ability to repay the loan. “No-doc” loans will be eliminated; therefore, borrowers will have to prove their income, assets and other required information.
A: Though not exactly, the QM rules are returning us to the days of meeting Top (Payment / Income) and Bottom (Payment + Long Term Debt / Income) ratios and minimal-down-payment requirements. Additionally, the property will need to be underwritten. Said another way, we will be moving away from low-doc/no-doc loans with drive-by appraisals. This move should bring more stability and certainty to the secondary mortgage market making it more likely for well-qualified purchasers to own but less likely that marginal buyers will qualify.
We claim that the American dream is to own a home and that owning on average creates greater wealth. While this is true, the statement "on average" is a dramatic qualifier. In reality, to create on-average wealth, some homeowners actually lose wealth. Otherwise, the statement would be unconditional -- owning a home creates more wealth for all individuals.
Policymakers have traditionally favored making ownership universal when, in fact, there is no evidence to support this goal. In fact, research shows that even under the most favorable terms for ownership, roughly 15 percent of all individuals would be better off renting rather than owning. Generally speaking, those that move rapidly and have a high propensity to save are better served by renting.
All things considered, therefore, we should avoid a universal concept of ownership. The new QM rules help make this possible by avoiding risk-sharing across a wide range of qualified to unqualified borrowers.
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