Proposed mortgage rules tighten limits on buyers' personal credit


WASHINGTON — The main part of the federal government's proposed new mortgage-finance rules — that only purchasers with a minimum 20 percent down payment on a conventional loan would get a shot at the best available interest rates and terms — has been widely reported.

But some of the other, lesser-known provisions could prove just as troublesome. They include:

Strict mandatory debt-to-income limits.

To get the best mortgage rates, buyers could spend no more than 28 percent of gross monthly income on housing-related costs and monthly household debt would not exceed 36 percent of income.
In contrast, Freddie Mac, for example, now has an overall debt-ratio limit of 45 percent of an applicant's stable monthly income.

Refinancing an existing mortgage to one with the best available interest rate would require at least a 25 percent equity stake in the house.

Refinancing to tap extra cash would require 30 percent equity.

Pristine credit standards.

For example, a borrower who was 60 days late on any credit account during the previous 24 months would be ineligible for a mortgage at the best available terms.

The so-called "qualified residential mortgage" proposals were released at the end of March by banking, securities, and housing regulators, along with the Department of Housing and Urban Development.

The agencies were required by the 2010 financial reform legislation to come up with new standards for low-risk conventional mortgages.

Congress did not specify what a "safe" mortgage should look like but directed the agencies to consider such factors as full documentation of borrower income and assets plus avoidance of toxic features such as negative amortization and balloon payments. Congress was silent on minimum down payments.

Under the law, loans that do not meet the strict tests will will be pushed into a higher-cost category and banks and Wall Street securitizers will need to place 5 percent of loan balances into reserves to handle possible losses from defaults.

Mortgage industry estimates of the interest rate difference between ultrasafe, qualifying loans and all others range from 0.75 to 3 percentage points.

In today's market, this would mean that mortgages that meet the federal agencies' stringent new standards might have interest rates of 5 percent. But all others — the vast majority of today's conventional loans — could carry rates from just under 6 percent to 7 percent and higher.

The proposals are out for public comment through June 10 and are not likely to be put into effect until mid-2012.

The agencies' proposal, although not the legislation, exempts from the rule mortgages sold to Fannie Mae and Freddie Mac as long as both remain under federal conservatorship. Also exempt would be FHA and VA mortgages.

Builders, consumer groups, banks, realty agents, and others are readying campaigns to persuade the regulators and the Obama Administration to back off some of their harshest provisions.

Michael Calhoun, president of the Center for Responsible Lending, argues that if adopted in its current form, modest-income and minority consumers would have much more difficulty affording a first home.