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CNNMoney: New Mortgage Rules Might Mean Fewer Choices for Borrowers

By    |   Friday, 06 December 2013 08:21 AM

Borrowers might have fewer mortgage options starting Jan. 10 due to the new rules and tougher regulations that are being placed on mortgage lenders.

In an effort to make mortgages safer, stricter regulations may deter smaller banks from competing due to the increased cost associated with these new regulations CNNMoney reports.

Strict penalties will be enforced for banks that do not comply with the Dodd-Frank provisions.

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With some banks being too small to play, David Stevens, CEO of the Mortgage Bankers Association, tells CNNMoney, "My concern is that we're going to be in an environment where some lenders are too small to comply."

Banks will be held accountable for making sure that borrowers have the ability to repay their loans, a sharp contrast from the previous housing bubble where some banks failed to check applicants' income or assets before they issued a loan.

Lenders will be held responsible for doing their due diligence and deciding if the borrower will be able to repay the loan. For instance, if total debt payments would exceed 43 percent of the borrower's income, banks cannot approve their loan. According to the new rules, lenders are forced to carefully examine bank records, tax returns, pay stubs and all paperwork submitted with the loan.

To stay in compliance, Anthony Hsieh, CEO of loanDepot, an online mortgage bank, argues that banks will have to update their underwriting policies and procedures, make a change in technology and re-educate employees.

"I expended a lot of effort to stay ahead of the new regulations," John Walsh, president of Total Mortgage, tells CNNMoney. "You just can't make mistakes these days."

Both small and large banks are outsourcing their mortgage underwriting to ensure quality explains Jeff Taylor, co-founder of Digital Risk, a provider of risk, compliance and transaction management services.

But some small banks can't justify the additional costs.

"Now that the refi boom is over, we'll see a lot of small banks fading away," Taylor maintains.

Ellen Schloemer, a spokeswoman for the Center for Responsible Lending, suggests that banks may be exaggerating the impact the new rules could have on their business, pointing to a report from CoreLogic that states lenders should be able to meet the requirements.

The report's authors indicate that lenders will "figure out a way to deliver . . . mortgages in a way that meets all the regulatory requirements, incorporates sound lending and consumer protections — and makes a profit."

In addition, new liquidity rules for banks will put a drag on mortgage lending, one of the most important sectors of the economy, a finance expert predicts in an article for American Banker.

The Federal Reserve's proposed Liquidity Coverage Ratio rule attempts to ensure that large banks have enough liquid assets to survive a severe liquidity crunch, says Clifford Rossi, a professor at the Robert H. Smith School of Business at the University of Maryland. Their high-quality liquid assets (HQLAs) would have to be at least 100 percent of net cash outflows during a 30-day stress period.

The proposal would discourage banks from holding safe, high-quality mortgages, he says. Mortgages backed by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, as well as high-quality non-GSE mortgage-backed securities and lines of credit from Federal Home Loan Banks will be less attractive to hold.

The liquidity rules give Ginnie Mae securities greater weight, classifying them in the top tier of liquid assets. GSE securities must be discounted by 15 percent, and they fall in the second tier of assets that cannot exceed 40 percent of HQLAs.

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Borrowers might have fewer mortgage options starting Jan. 10 due to the new rules and tougher regulations that are being placed on mortgage lenders.
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2013-21-06
Friday, 06 December 2013 08:21 AM
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