New Regulations Make Life More Difficult and Expensive But Mortgage Lending Goes On

The Consumer Financial Protection Bureau “(CFPB”) is a new federal agency which is in charge of protecting consumers in financial transaction. Since it was formed in 2011, they have spent a great deal of time investigating and then fining mortgage banks for violations of various lending laws. Unfortunately, the CFPB has spent a lot of time fining banks and mortgage loan originators; this has not really ended up helping consumers.  It also has not hurt the lending business as much as people thought it would. Though, it did result in driving many small mortgage companies out of business which left us only with the larger companies in a Darwinistic “survival of the fittest” (in this case, financial) way.

Though these CFPB regulations make it more expensive for lenders to do business by necessitating additional staff to comply with these regulations much more paperwork to document this they have not really resulted in less access to credit. What these regulations have done, however, is increase the costs tremendously to originate each loan. As a consequence, it has raised the cost of borrowing to individuals who want to purchase a home or who want to refinance their home. Closing costs are higher now than they have ever been as all providers from credit companies to title companies to settlement services charge more their services due to the increased work to comply and risk for non-compliance.  Similarly, even though the interest rates right now are very low, they would probably be significantly lower if all of these extra compliance costs did not need to get built into the profitability of each loan.

Presently, interest rates are about 4% on a 30 year fixed and about 3.25% on 15 year fixed. But based on the state of the economy and the mortgage markets they should probably be lower. Hopefully at some point, the government will ease off some of the restrictions that they placed on the lenders and allow the market to correct itself, which it has already done. A lot of the regulations were implemented to consumers protect against some risky loan products such as sub-prime loans, negative amortization loans and stated income loans. This was a very worthy goal.  However, once these loans began to unravel with lenders facing huge losses for making them, the lenders themselves stopped offering these products.  In fact, none of these loan types have been made for the last several years because the banks realized that these loans are too risky to make.  Moreover, by making them it cost the lenders hundreds of millions of dollars to settle lawsuits resulting from these loans.

Right now lenders are a little fearful of lending to people who are not quite as credit worthy as they could be but who might otherwise be able to buy homes.  These people may have enough money for a small down payment and good jobs that will allow them to pay back the loan. But, lenders are concerned that if the borrowers do not satisfy all of the lending requirements or if discretion is used in approving a loan that later goes bad, the CFPB or the consumer may bring a claim for a failure to comply with the Ability to Repay rule. Under the Ability to Repay Rule, lenders have to make sure that the borrowers have sufficient income and have sufficient assets to pay their loans back. Even though there are “Safe Harbors” if loans are made in compliance with Fannie Mae. Freddie Mac or FHA guidelines, there could still be some risk in making these loans.

The good news though is that, the banks are trying to create additional revenue and they are now starting to loosen up their guidelines. As the bank’s balance sheets have improved, they are starting to ease up a bit on their credit requirement. Lenders also realized that in order to continue to make profit in the mortgage business, they going to have to find additional borrowers to lend to. There are just not enough borrowers with perfect credit, perfect income and perfect asset. So lenders are easing up just a bit on the guidelines though not yet on the amount of the paperwork. There’s still a tremendous amount of paperwork required to get a loan approved.  But, if a borrower can provide it, there is definitely mortgage money available.

In conclusion, I think that the lending market has gotten better for people who are looking to buy a house and for people who are looking to refinance. Even though it is a tough environment because of all the new government regulations, the lenders are finding a way to work with it and to bring our market back towards a normal functioning one.

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