In recent months, the housing market has seen steady improvement. Home prices and interest rates are up, but so are housing applications and purchases. While prospective homebuyers are demonstrating increased confidence in the market, this positive activity has also been somewhat tempered by the more stringent requirements set in place for lenders by the Consumer Financial Protection Bureau (CFPB) earlier this year.
New Stipulations
In early 2013, the CFPB approved a number of rules that restrict the activity of mortgage lending institutions. These rules prohibit lenders from granting loan terms that exceed 30 years, and they also forbid certain unique, special case conditions, such as periods in which homebuyers only pay interest on the principal loan. Additionally, mortgage fees are not to exceed 3% of the entire mortgage that’s granted, and the debt-to-income level of applicants must not exceed 43%.
Reasoning and Rationale
Some lenders are skeptical of these new regulations, seeing them as an infringement on their rights as independent institutions. However, as the CFPB stresses, the goal behind these new rules is to avoid another national economic crisis like the one triggered in 2008, when a glaring lack of regulation and oversight resulted in ultimately disastrous lending decisions. Relatedly, the new rules aim to decrease the risk involved for both buyers and lenders, as more stringent requirements increase the chances that a buyer will be able to successfully pay off the loan.
Immediate Effects
The individuals that will be most negatively impacted by these new regulations are those in the lowest socio-economic strata, who will likely be forced to rent rather than buy for a longer period of time. The age and income levels of first-time homebuyers will also likely increase, as lenders will require individuals to be more financially stable before granting them a mortgage loan. While this may be frustrating to some prospective buyers, it can also be beneficial, as it requires these individuals to be more financially savvy and conscientious about budgeting and saving to purchase a home.
Long Term Effects
In the long term, the members of the CFPB hope that the new regulations will help ensure that the economy continues to improve, as there will be fewer foreclosures and bankruptcy cases. These changes may also change the way we think about home ownership in America. As many economists have pointed out, America is one of the only countries in the world where owning a home is considered such a priority, and where even the poorest individuals in society are granted home loans. Over time, the number of families who choose to rent rather than buy may significantly increase.
If you are a prospective homebuyer who is about to undergo a mortgage application process, be prepared to face a slightly stricter evaluation and more extensive background check from your lender. While this may slow down the application process a bit, it is important to keep in mind that the lending criteria changes that are causing this delay have been put in place to protect you from future financial problems.
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