The New Mortgage Rules To Protect The Borrowers And The Lenders

The Consumer Financial Protection Bureau announced the "Qualified Mortgage" rule last Thursday, January 10. The new home-lending standards are designed protect the would-be borrowers from mortgages they can't afford and in return, grant the lenders some protection against lawsuits by borrowers who claim they shouldn't have been granted a mortgage in the first place. The new rule will also determine what type of loans can be extended by the banks and to whom. The new rule is a result of the 2010 Dodd-Frank Act, which is meant to help prevent the the return of the lending practices that resulted to the crash of the housing market in 2007-2010.  The new rules will take effect in January of 2014.

The housing crisis was brought about by the banks' willingness to lend without proof of income or without regard to overall indebtedness.

The "Qualified Mortgage" rule states that a borrower's monthly debt service should not exceed 43% of pre-tax income.  This rule will protect the would-be borrowers from the mortgages they can't afford,  For more details, check out this video, http://video.cnbc.com/gallery/?play=1&video=3000140442.  People who make enough money for their daily expenses may have a hard time qualifying for a mortgage..  It means that some people living in high-cost areas will not be able to buy a house of their own.

The upfront fees cannot exceed 3% of the loan.

'Exotic' mortgages like interest-only loans that don't require principal payments, loans carrying balloon payments, loans where principal increases over time and loans with 30-year term will not be considered for the "Qualified Mortgage" rule. (Source: www.forbes.com)

If the loan meets all criteria, lenders won't have to fear a lawsuit from the borrower.

Holden Lewis, a senior mortgage analyst at Bankrate.com predicts that, "Here’s what will change as a result of this rule: The next time there’s a housing boom, this rule will prevent lenders from losing their heads and, in the heat of competition, relaxing lending standards too much."

Debra Still, chairman of the Mortgage Bankers'Association said that, "We believe the rule will effectively block the return of risky product features and inadequate documentation.  If it also provides lenders the certainty needed to originate qualified mortgages broadly across the market to creditworthy borrowers, it will have been a success."

However, the effectiveness of the new rule is yet to be seen.   For the full documentation of the new "Qualified Mortgage" rule, please refer to http://www.housingwire.com/sites/default/files/editorial/201301_cfpb_ability-to-repay-summary%283%29%281%29.pdf