By Carole Hawkins, Staff Writer
New rules that went into effect in January as a result of the Dodd-Frank Act won’t affect real estate professionals directly. But, they will affect people buying homes by tightening up requirements for mortgages.
The trickle-down to the industry could be some depression of consumer demand, said Gil Pomar, Northeast Florida market president for CenterState Bank.
“It makes the rules for qualifying for a mortgage much more stringent,” he said. “Depending on what side of the fence you’re on, it’s either good or it’s overzealous. Any time you restrict supply to mortgage lenders doing business, you can restrict commerce.”
The new rules, called Ability-to-Repay and Qualified Mortgages, aim to ensure loans made to homeowners are financially sound by limiting certain high-risk practices.
The Ability-to-Repay rule specifies what steps banks must take to ensure borrowers can repay their mortgages. During the housing boom that led to the Great Recession, lenders frequently issued “low-doc” and “no-doc” loans.
Now, under Ability to Repay, lenders must:
• Contacting the human resources department where the borrower is employed and documenting the date, time and with whom they spoke.
• Verify a borrower’s income by directly accessing IRS tax records.
“It used to be you could just get a W-2 from the borrower,” Pomar said. “It may be overkill to do it this way. But I guess because enough people cheated back in the day, they now say you have to verify it.”
The Qualified Mortgage rule eliminates some high-risk features in home mortgage contracts. The requirements are:
• A homebuyer’s debt-to-income ratio cannot exceed 43 percent.
• Points and fees paid by the borrower must not exceed three percent of the total amount borrowed.
• No interest-only loans, where the borrower pays interest only for a certain amount of time.
• No negative-amortization loans, where the principle increases over time, even while monthly payments are being made.
• No loan terms beyond 30 years.
• Balloon loans are prohibited in most cases.
Lenders don’t have to issue a qualified mortgage, but doing so protects them from borrower lawsuits.
Of the new restrictions, Pomar expects the 43 percent debt-to-income ratio will have the most effect on home sales.
“It makes things a little black and white,” he said. “There are many times I’ve approved loans over 43 percent, because there were extenuating circumstances, and they were great loans.”
A borrower could have debt from alimony payments that expire in a month, Pomar said. Or, have debt from another house loan, but the house is under contract to be sold.
“The rule will prohibit banks from doing some of the things they may have done normally,” he said.
Some of the regulations add extra documentation to mortgage lending, but those delays and headaches will be felt more by the banks than by homebuyers or real estate professionals, Pomar said. If developers see any drag in business from the new Dodd-Frank rules, it will appear in the form of homeowners not qualifying for mortgages, he said.
“It definitely will affect the builders, but I don’t think it’s going to be a huge effect,” Pomar said. “As the economy gets better, you’re going to see more people qualifying for loans.”
A debt-to-income ratio is equal to a borrower’s total monthly debt payments divided by their gross monthly income, before taxes and deductions. It is one way lenders measure an applicant’s ability to manage monthly payments.
New Dodd-Frank rules that started this year prohibit loans to borrowers that cause their debt-to-income ratio to be higher than 43 percent.