The average homebuyer has encountered countless obstacles while attempting to buy a home over the last few years. Back in 2009 and 2010, when nearly half the listings were short sales or bank REOs, getting an offer accepted was nearly impossible. Banks had no idea how to cope with their huge number of bad loans. Getting a response to an offer could take months. Finally, after two years of confusion, the banks got their act together. Their response time to an offer was better but the appraisals were so low, buyers had problems and delays with their financing. By 2011 appraisers finally started noticing property values were increasing but by that time, homebuyers were facing another problem — investors. Once a buyer found a home, it was either sold before they could put in an offer or there were multiple offers. Between the summer of 2011 and summer of 2013, it was nearly impossible to find a nice, affordable home without competing with investors, all cash buyers and multiple offers.
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It might appear homebuyers are finally going to get a break. Investors have left for other more attractive markets, homes are appraising at their selling price, banks respond within days to an offer on their few foreclosures and short sales and very few homes have multiple, all-cash offers. So after years of being on the short end of the stick, are homebuyers finally going to get a break? Not a chance. In January, new banking regulations implemented by the Consumer Financing Protection Bureau make it more difficult than ever for many homebuyers to qualify for a loan.
A little background may be helpful. Before the government’s absolute takeover of the mortgage market, there were private investors with private money who purchased mortgage loans originated by banks and mortgage brokers. These conduit lenders had similar Fannie/Freddie loan underwriting guidelines. They also made loans to borrowers that did not fit into a conforming loan category. Borrowers had choices. Perhaps they owned a small business or were self-employed. Maybe their income was seasonal or included commissions and bonuses. This borrower profile was typically outside the loan guidelines set by Fannie/Freddie and, if it were not for alternative private investors, many hom buyers would not have been able to obtain financing and buy a home.
Alternative mortgages were always a small percentage of home loans up until 2000. That changed. Alternative financing became “creative” financing which became “sub-prime” financing which became the majority of residential loans. These loans became so popular that Congress pressured Fannie/Freddie to relax their traditional underwriting guidelines and allow more folks the opportunity to own a home. By August 2007 the party was over. The growing default rate nearly collapsed the financial markets and in September 2008, Fannie and Freddie were placed into conservatorship. Today 90 percent of all mortgages are held by the government through their ownership of FHA, VA, Fannie Mae and Freddie Mac.
Today, the Consumer Financial Protection Bureau is one of several federal agencies that supervise banks and lenders. In January the department implemented its new “Qualified Mortgage.” Mortgage loans must now meet the more difficult definition of a QM in order for lenders to sell that loan to Fannie/Freddie. Since lenders sell 90 percent of their loans to Fannie/Freddie they will be careful that the loans they originate meet the more stringent OM standard. So what’s wrong with a QM? Plenty.
The new debt ratio will disqualify many. In order to have a QM designation, a borrower’s total debts, including the new mortgage, must not exceed 43 percent of their monthly income with no consideration for compensating balances. A borrower could have a million bucks in the bank, a down payment of 50 percent and if their debt ratio is over 43 percent of their monthly income, too bad, no loan. Underwriting “guidelines” have been replaced with a one-size-fits-all hard rule.
Conforming loans have always taken into consideration a borrower’s debt ratio but past loan guidelines have allowed for much higher ratios when the borrower’s down payment exceeded 25 percent, they had high credit scores and had substantial cash reserves. Private lenders would have been an alternative 10 years ago but not today.
Owners of a small business, commissioned sales people and others self-employed will have a difficult time meeting the definition of a QM. Their consistent monthly income must meet the 43 percent debt rule. Most don’t, with income that often fluctuates from month to month or is seasonal. A commercial fisherman may earn $100,000 during three months of the season and not qualify for a loan because he shows no monthly income for nine months.
Recently divorced, widowed, retirees, landlords and investors with non W2 steady monthly incomes will also face a tough time. Regardless of their net worth, down payment and good credit, if during a few months their monthly debts exceed the 43 percent, they don’t qualify.
“Get ready for some exceptionally bumpy mortgage market conditions in the first half of 2014,” said local mortgage broker Dennis Amaral. “More contracts written on home purchases are likely to fall through.”
The real estate industry has learned our lesson well. Not everyone should own a home and no one is objecting to caution when determining a borrower’s repayment ability. However, qualifying for a loan should be made after examining the borrower’s complete financial picture not just one arbitrarily set debt ratio.
Ken Calhoon is a local real estate broker and cab be reached at [email protected]