What the new mortgage rules mean for you


New mortgage lending rules are going into effect Friday that aim to put an end to the worst mortgage lending abuses of the past.

The new rules are designed to take a “back to basics” approach to mortgage lending and lower the risk of defaults and foreclosures among borrowers, according to the Consumer Financial Protection Bureau, which issued the new rules.

“No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common-sense rules, which take effect today,” said CFPB director Richard Cordray in remarks prepared for a hearing Friday.

Mortgage lenders are being asked to comply with two new requirements: The Ability to Repay rule and Qualified Mortgages. Here’s how they will impact borrowers:

Ability to Repay

  • Lenders must determine that a borrower has the income and assets to afford to make payments throughout the life of the loan. To do so, the lender may look at your debt-to-income ratio, which is how much you owe divided by how much you earn per month, including the highest mortgage payments you would be required to make under the terms of the loan. To calculate your debt-to-income ratio, add up all your monthly obligations — including student loan, credit card and car payments, housing costs, utilities and other recurring expenses — and divide it by your monthly gross income.
  • In an effort to put an end to no- or low-doc loans, where lenders issue risky mortgages without the necessary financial information, lenders will be required to document and verify an applicant’s income, assets, credit history and debt. For borrowers, that means more paperwork and longer processing times.
  • Underwriters must also approve mortgages based on the maximum monthly charges you face, not just low “teaser rates” that last only a matter of months, or a year or two, before resetting higher.

Qualified Mortgages

  • To make sure you aren’t taking on more house than you can afford, your debt-to-income ratio generally must be below 43%. This rule is not absolute. Banks can still make loans to people with debt-to-income ratios that are greater than that if other factors, such as a high level of assets, justify the risk.
  • Qualified mortgages cannot include risky features, such as terms longer than 30 years, interest-only payments or minimum payments that don’t keep up with interest so your mortgage balance grows.
  • Upfront fees and charges cannot add up to more than 3% of the mortgage balance. That includes title insurance, origination fees and points paid to lower mortgage interest rates

The rules also restrict “steering,” or practices that give financial incentives to loan officers or mortgage brokers for pushing people into higher-interest loans that they can’t afford — a practice that was all too common leading up the housing bust, Cordray said.

“We think the new rules are balanced and well-drawn. They will offer consumers protection without limiting credit to qualified borrowers,” said Gary Kalman, the policy director for the Center for Responsible Lending.

Lenders don’t seem to be too worried about the new rules, according to Keith Gumbinger of HSH.com, a mortgage information provider. “It’s no surprise; everybody has been preparing for the change for months,” he said. “Because there will be additional underwriting scrutiny, it could gum up the works initially and slow loan processing, but it’s really just the codification of things that are already in place.”

A significant factor is what’s not in the rules. There’s no minimum down payment or credit score requirement.

“[The qualifed mortgage] is not taking a one-size-fits-all approach. It ensures that first time homebuyers can still come to the table,” said Kalman.

If the rules required a minimum down payment of, say 10% or 20%, it would eliminate many first time buyers who would have a difficult time raising that much cash.

The lack of a credit score requirement will enable lenders to loosen currently tight underwriting standards in the future should conditions warrant, according to Gumbinger. For the moment, most loans will still have to be backed by Fannie Mae and Freddie Mac, and, with a few exceptions, they won’t approve applicants with scores below 620.

(Source: CNN Money)

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Home Equity Gains Spur the Economy as Owners Spend


Americans flush with cash as they regain equity in their homes are spending more after years of pinching pennies.

The share of owners whose homes are worth at least 50 percent more than they owe on their mortgages rose to 18 percent in the fourth quarter as property prices gained, up from 16 percent in the prior three months, according to a report today by RealtyTrac, an Irvine, California-based real estate data firm. U.S. homeowners held $9.7 trillion of equity in the third quarter, a 4.5 percent gain from the earlier period, according to the Federal Reserve.

Rising home values are boosting the economy by giving owners more confidence to buy appliances, electronics and cars, saidDaren Blomquist, a RealtyTrac vice president. Every $1 gain in home equity adds as much as 3 cents to personal spending that accounts for about 70 percent of the economy, said Mark Zandi, chief economist with Moody’s Analytics Inc. in West Chester, Pennsylvania. Using that formula, equity gains in the third quarter will spur more than $12.5 billion of consumer outlays.

“The most important ingredient that comes with added equity is confidence,” Blomquist said. “I don’t think we’ll see a repeat of the last real-estate boom when owners used their homes as ATMs. We will see them buying more of the things they deprived themselves of when their home values were dropping.”

The housing crash starting in mid-2006 humbled homeowners who are just beginning to have faith in the real estate recovery, Zandi said. Increasing home prices have created almost $3 trillion of real estate wealth since the beginning of the rebound two years ago, according to Fed data. Equity growth has reached a tipping point where it will begin “juicing the economy” this year, Zandi said.

Spurring Growth

“For most people, their home is still far and away their most important asset, and when it appreciates in value it gives them a much brighter perspective on their finances,” Zandi said. “The lackluster spending we’ve seen in the recovery so far is going to be pushed a notch higher because of real estate.”

The economy expanded in the third quarter at the fastest rate in almost two years, the Commerce Department said last month. Gross domestic product climbed at a revised 4.1 percent annualized rate, the strongest since the final three months of 2011 and up from a previous estimate of 3.6 percent.

Personal spending increased 0.5 percent in November following the prior month’s 0.4 percent gain, the Commerce Department said last month. Auto sales advanced to a 16.3 million annualized rate in November, the highest since May 2007, according to data from Ward’s Automotive Group.

Retail Sales

“Consumer spending in the recovery is best described as episodic,” said Neal Soss, chief economist at Credit Suisse Group AG in New York. “A lot of the activity in the last few months has been associated with big-ticket items like cars.”

Retail sales rose 3.5 percent during the holiday season, helped by deep discounts at malls and purchases of children’s apparel and jewelry, MasterCard Advisors SpendingPulse said. That compares with a 0.7 percent gain during the holidays in 2012. Purchase, New York-based SpendingPulse tracks total U.S. sales at stores and online via all payment forms.

The economic boost from equity gains will be smaller this time around compared with the real estate boom that ended in mid-2006 because home values in many markets haven’t reached their pre-bust levels, Zandi said. As prices soared about a decade ago, every $1 in equity gains created about 8 cents of spending, he said.

“We’re still crawling out from the collapse and people aren’t willing to leverage in the same degree as during the bubble,” Zandi said. “The wealth effect was massive during the boom as people cashed out every cent they could, contributing to the bust and the financial collapse,” he said.

Below Peak

The median U.S. home price surged 27 percent last year through November, from a low in January 2012 that was the cheapest in 15 years of data from the National Association of Realtors. Homes sold in November at a 4.9 million annual pace, 42 percent above a 2010 record low.

Home prices are 15 percent below a mid-2006 peak, according to the Realtors’ group. In cities hard-hit by the crash, the difference is more dramatic. Las Vegas property values are 46 percent below their 2006 peak, despite a 42 percent surge since early 2012, according to the S&P/Case-Shiller home-price index. Phoenix is 37 percent below its peak seven years ago.

Owners deeply underwater, whose homes are worth at least 25 percent less than their combined mortgages, are slowly emerging from their predicament. In December, 9.3 million homes were deeply underwater, representing 19 percent of all residential properties with a mortgage, according to today’s report from RealtyTrac. That’s down from 10.7 million in September.

“We’ve seen an enormous improvement in home equity, but it will be years before we get back to pre-bust levels,” Credit Suisse’s Soss said.

(Source: Bloomberg)

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The History of Mortgage Rates

Since 1971, when mortgage rates first started being tracked, they have ranged from a high of 18.63 percent in the early 80′s to a low of 3.20 percent in late 2013. Currently, rates are still relatively low and for many prospective home buyers, low rates can greatly affect the affordability of a home and the monthly mortgage payment. But, what will the future hold?

“After dropping to all-time lows at the end of 2012, rates have steadily rebounded throughout 2013. Now that the Federal Reserve has announced plans to begin winding down its stimulus program, which has helped keep rates low while the economy was still fragile, we expect rates will rise above 5 percent in 2014 as the economic recovery gains steam. Although those who missed out on mortgages in the 3 percent range may be disappointed that they missed that historic window, rates are still extraordinarily low by historic standards,” says Erin Lantz, director of Zillow Mortgage Marketplace.


Purchasing a home
If you are looking to purchase a new house this year, now is the time to take advantage of today’slower rates. For comparison purposes, if mortgage rates rise to 5 percent, that means a monthly payment on a $200,000 loan will rise by roughly $160 a month.

If your mortgage rate is above 4.5 percent, consider refinancing while rates are still low. It’s important to know that even if you owe more than your home is worth you may be eligible to refinance through government programs like H.A.R.P. 

(Source: ZillowBlog)

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Real estate: Look for value in 2014


In Money magazine’s Make More in 2014, you’ll find next year’s economic outlook, where to find opportunities in stocks and bonds, the best moves for homebuyers, sellers and owners, and strategies for boosting your career. This installment: How to play the housing market.

The good news for housing is that price gains next year are expected to be only about half as strong as in 2013, when sellers stayed on the sidelines. Yes, that’s good news. “For a sustainable recovery you want to see more balance between buyers and sellers,” says David Stiff, chief economist at CoreLogic Case-Shiller, which is forecasting a 6.8% rise in the median home value for 2014.

Inventory is already improving. Nationwide, the number of homes for sale in September rose 1.8% vs. a year earlier, according to the National Association of Realtors. That’s the first increase since late 2011. In Los Angeles, Atlanta, and Orlando, inventory was 10% or higher than a year earlier.

“It will still be a sellers’ market in 2014, given how far we have before inventory is back to normal,” says Jed Kolko, chief economist at Trulia, noting the supply of homes in September was still about 15% below historical norms. “But it will not be as extreme as 2013,” he says.

Buyers will also enjoy an advantage next year as real estate investors are expected to be less of a factor. Why? In an improving market, there are fewer distressed homes, which they covet. According to the Campbell/Inside Mortgage Finance HousingPulse Tracking survey, the investor share of residential home purchases fell from 23% earlier this year to 17% in September. In a more balanced market like this, here’s what you can do to get an edge:


Waiting for more inventory can make sense if you have a dream home in mind. But in 2014 there will be a price for delay — 30-year fixed-rate mortgages are forecast to climb from today’s 4.5% to more than 5%.

Work with a fast closer. Qualifying for loans is easier now, but speed is another issue. Franklin, Tenn., agent Patty Latham says she will not work with buyers using a particular lender that has missed several deadlines. For speed, Virginia agent Rob Wittman suggests sticking with local lenders with ties to nearby appraisers.

What’s fast? John Wheaton at Guaranteed Rate says, “Where 45 days was the norm, you can get an express closing in 20 days and even faster.”

Lead with a credible offer. At a time of multiple bids, low-balling isn’t the way to go. “The reality is, sellers don’t have to come back to you with a counter if they’ve got better bids,” Wittman says. Of course, you don’t want to overpay either. Even in markets that are starting to experience bidding wars, such as L.A. and Boston, final sales prices are still typically about 1% below asking. Use that and your agent’s local knowledge and go in with a respectable bid.


If you like your home and are not in a rush to sell, you have great flexibility. For instance, your rising home equity will make it easier to borrow against the property. That can help pay for deferred maintenance or home renovations you’ve been eyeing for years — which will only add value when you eventually put your home on the market.

Remodel within reason. Home-improvement spending is expected to grow by double digits through mid-2014, according to Harvard’s Joint Center for Housing Studies. Atop the wish list: bathroom and kitchen jobs.

Keep resale in mind. While the focus was on value at the market lows, today “homes with all the fixings are the ones attracting multiple buyers,” says McLean, Va., real estate broker Jon Wolford. So, yes, you can splurge a bit, but don’t go crazy. Remodeling Magazine’s cost-vs.-value survey found that moderate kitchen remodels ($57,500) recouped 69% of their cost, close to what minor jobs paid back. Over-the-top projects ($111,000), though, recouped less than 60%.

Take advantage of low home-equity rates. While 30-year mortgages rose nearly a point this year, rates on home-equity lines of credit have fallen a bit to 5.1%. That’s because HELOCs are tied to short-term rates that the Fed isn’t likely to hike until 2015.

If you’ll need to repay your loan over many years, though, go with a fixed-rate home-equity loan. Today’s 6.25% average is about 0.25 points lower than a year ago, as lenders are now more interested in doing deals, says Keith Gumbinger at HSH.com. Credit unions can be the best place to shop for home-equity loans. The average credit union rate is 5.75%.


List too early and you’ll leave gains on the table. Wait too long and rising borrowing costs might put an end to bidding wars. You can’t time the market perfectly, but you can keep an eye on inventory trends. Ask your agent to give you a monthly report on the number of listings compared with closings. Housing trends play out gradually.

Once you see a big uptick in listings relative to closings, you’ll know price gains are getting ready to slow — and that it’s time to act.

Price it right the first time. Don’t waste your time by listing too high only to have to wait and lower the price. “Buyers are smart these days — they know where the market is, and now that rates are higher, they aren’t going to bite on a list price above recent comparables,” says Sara Fischer, an agent with Redfin based in San Diego. The real estate site Zillow reports that about one-third of listed homes in August had a price drop, up from 26% earlier this year.

Play tour guide for the appraiser. If your buyer’s lender gets an appraisal that comes in lower than the agreed-upon price, you’re in for plenty of headaches — even in an improving market. You’ll have to lower the price, the buyer will have to cough up a bigger down payment, or worst case, the deal might collapse, sending you back to square one.

Fischer recommends that sellers be present when appraisers come by. “They don’t want to listen to the agent,” she says. “But if you’re the owner and can walk them through all the improvements, that can help the appraiser better understand what has gone into the home.” She recommends handing the appraiser a spreadsheet of all upgrades, listing when they were done and the scope of each project.

(Source: Money Magazine)


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Mortgage borrowers who don’t use online tools to comparison shop may be losing out


Consumers who don’t use online technology to shop for mortgage rates or look for a lender or real estate agent may be selling themselves short, with lower-income borrowers particularly at risk, according to Fannie Mae economists.

Findings from a recent study suggest that online tools that improve borrowers’ understanding of mortgage terms and costs and allow borrowers to simultaneously compare loan terms from multiple lenders lead to better outcomes, including lower costs, fewer surprises at the closing table, and higher long-term satisfaction with choices, Fannie Mae’s Economic & Strategic Research Group said.

The study found significant differences between how lower- and higher-income borrowers shop for a mortgage. The group defined lower-income borrowers as those with family incomes of less than $50,000 and higher-income borrowers as those with family incomes of more than $100,000.

Higher-income mortgage borrowers were more likely to:

  • Select a lender based on offer competitiveness.
  • Rely on their own calculations and make more extensive use of tools to calculate how much to borrow.
  • Say that they would welcome the ability to shop and compare loan terms from multiple lenders.

Lower-income borrowers put more stock in referrals from a real estate agent, mortgage specialist, family member, friend or co-worker than higher-income borrowers did, said Steve Deggendorf, the research group’s director of business strategy, in a study commentary.

The research group pulled second-quarter 2013 data from the mortgage giant’s National Housing Survey, which polls more than 1,000 homeowners and renters each month.


Higher-income borrowers used online shopping tools about twice as often as lower-income borrowers, though all income groups said they would like to use the Internet to shop even more than they currently do.This indicates that online tech will likely play an increasingly larger role for all borrowers in the mortgage shopping process and offers opportunities to improve that process, Fannie Mae economists said.

There’s plenty of room for improvement. Among survey respondents, only 5 percent of lower-income borrowers and 12 percent of higher-income borrowers said they had used online tools or applications to calculate how much to borrow through their mortgage loan.

While nearly half, 48 percent, of higher-income borrowers said they had obtained a mortgage quote online, only 20 percent of lower-income borrowers had.

When it came to deciding how much money to borrow, advice from a lender or real estate agent was the most influential factor for 23 percent of lower-income borrowers. For higher-income borrowers, that figure drops to 15 percent.

Despite the rise of mobile devices and social media, consumers said they were much more likely to use desktop computers than mobile devices or social media to shop for their mortgage and manage their personal finances in the future.

Recent mortgage borrowers — those who had obtained a mortgage in the past three years —  were more likely to use technology to shop for a mortgage, perhaps because the use of online tools has grown in general, and because such borrowers were younger, more educated and earn higher incomes than prior borrowers.


(Source: Inman News)

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