As the industry prepares to implement the ""Consumer Financial Protection Bureau's"":http://www.consumerfinance.gov/ (CFPB) new ""ability-to-repay rules"":https://themreport.com/articles/cfpb-releases-qualified-mortgage-criteria-establishes-legal-protections-2013-01-10, ""Federal Reserve"":http://www.federalreserve.gov/ Governor ""Elizabeth Duke"":http://www.federalreserve.gov/aboutthefed/bios/board/duke.htm warns new consumer protections may come at a cost to the industry as lower-quality-credit borrowers are precluded from the housing market.[IMAGE]
""It will be up to policymakers to find the right balance between consumer safety and financial stability, on the one hand, and availability and cost of credit, on the other,"" Duke said during a speaking engagement at the Mortgage Bankers Association's ""Mid-Winter Housing Finance Conference"":http://www.midwinterconference.com/2012/default.html.
Loans that do not fall under the CFPB's qualified mortgage (QM) standards may soon pose more costs to lenders, according to Duke.[COLUMN_BREAK]
Non-QM loans are open to more potential litigation, which poses new costs to lenders. If securitized, lenders must maintain part of the risk for these loans--another potential for increased costs. Lastly, Duke pointed out ""investors may be wary of investing in securities collateralized by non-QM loans because it is difficult to gauge the risks.""
Increased costs may deter lenders from making non-QM loans to lower-credit-quality buyers.
Attempting to cover these added costs by charging higher interest rates or points and fees may have a hard time doing so.
Lenders who charge higher interest rates may not hold as strong of a defense against a lawsuit alleging violation of the ability-to-repay rule, according to Duke.
Additionally, QM rules prohibit points and fees that exceed 3 percent of the loan amount, Duke points out. While conceding this stipulation does protect consumers from being ""overcharged or defrauded,"" the rule, Duke says leaving lenders without a way to account for the added risk and costs of lending to lower-quality borrowers may lead lenders to stop making these loans at all.
As the broader economy continues to improve, household formation will increase, according to Duke, ""but if credit is hard to get, these will be rental rather than owner-occupied households.""
""And without first-time homebuyers, the move-up market will be sluggish, new and existing home sales will be more subdues, and purchase mortgage volumes will return only slowly,"" Duke said.