Five years after the housing collapse, the new Consumer Financial Protection Bureau is closing the barn door on the loose lending that caused the crisis. But as homebuyers struggle to get financing for new homes, some critics fear the door could be permanently nailed shut for many people seeking affordable housing.
The new lending rules will limit people from taking out a mortgage or refinancing an existing one that puts their overall household borrowing at more than 43 percent of their income. That new debt cap also includes a wide swath of common forms of debt that count toward the total, including student loans, most fees and points related a home purchase, and property taxes. It also tightens rules on documentation, and lenders who improvise to give customers easier terms will be open to consumer lawsuits if the loans go bad.
"It will tighten things further. The largest constraint is the 43 percent threshold," says Sam Khater, senior economist at housing data provider CoreLogic. "It will hit more refinances than purchases because a lot of them use a high debt-to-income ratio. It will also hurt home borrowers in distressed environments."
Mortgage lenders say the rules could make loans especially elusive for some classes of borrowers, even those with strong credit scores. Baby boomers entering retirement and young adults will feel a disproportionate impact because of their lower income levels.
Based on interviews with mortgage lenders, real estate trade groups and market research firms, these groups are most likely to find borrowing more difficult when the rules take effect Jan. 10, 2014:
• First-time homebuyers, especially those who are carrying college loans that count toward the debt limit.
• Those who lost jobs in the recession or have had career disruptions in the past five years. Verification of job history and employment standing are key requirements at a time when unemployment has been historically high.
• People who live in either high-priced housing markets or places hit hard by the housing collapse. The most populous U.S. state is among those most at risk: California, hit hard by foreclosures, still has some of the costliest U.S. real estate. Jumbo loan caps under federal housing guidelines have been reduced from over $700,000 to just above $400,000. In California, the average median home price was $352,000, up nearly 30 percent in a year, according the San Diego housing research firm DataQuick.
• Small businesses or independent contractors whose incomes fluctuate, or people who have chosen to shift into lower-paying jobs. This is one of the fastest-growing workplace populations. Recently divorced or widowed people could also face added scrutiny even if they are qualified to borrow.
• Retirees with adequate savings to finance home purchases or refinance. Lack of current income makes borrowing more difficult.
• Homeowners who wish to refinance but have lost some or all of their equity in the real estate bust.
• Those who live in regions hit by Hurricane Sandy, which have experienced sharp increases in flood insurance. Second-home and rental-property buyers are already having trouble getting financing in many areas. Newly designated Quality Mortgages will encourage lenders to seek more kinds of mortgage and homeowner coverage.
All told, private research firms say that from 10 percent to 50 percent of borrowers who now qualify will lose out. The CFPB, which authored the new rules, concedes that more borrowers will be rejected. But the consumer agency says the people who fail to reach Qualified Mortgage, or "QM" status, tend to be either "very marginally qualified" low-income borrowers or wealthier ones with private lending alternatives, and the exclusions amount to less than 10 percent of those currently eligible.
"Some of the stringent guidelines are going to mean that some very qualified borrowers will be turned down. I do fault [the CFPB] for that," says Jordan Roth, senior branch manager of GFI Mortgage Bankers, a New York-area housing lending firm. "The landscape is being reshaped. But you will still search around and find a lender if your loan makes sense."