New mortgage rules that take effect Jan. 10 are designed to protect borrowers and lenders from the ills of the last housing crash. If lenders apply the rules, they are protected from legal recourse by borrowers or investors should the loans go bad.
The rules, however, are not mandatory, and some lenders say they will make loans outside of them, especially in the jumbo and adjustable-rate spaces.
Under the Dodd-Frank financial reform legislation, all lenders are required to ensure that their borrowers can repay their mortgages. Lenders can prove they've done that automatically by following new rules from the Consumer Financial Protection Bureau. The rules allow for adjustable-rate loans, but they have to be underwritten to the highest possible adjusted payment. Loans can have no high fees, no interest-only features and, perhaps the biggest hurdle, a debt-to-income ratio no greater than 43 percent. If all those rules are followed, the loan is deemed a "qualified mortgage" (QM) and the lenders are protected from most legal action.
While most loans being made today already fall into the QM category, more borrowers faced with rising interest rates are taking out adjustable-rate loans, which have lower monthly payments, and could therefore face the tougher underwriting. Also, the size of the average mortgage applied for today is the largest in history, at nearly $270,000, according to the Mortgage Bankers Association. That could cause more borrowers to fail on the debt-to-income requirement.
"The buyers that are out there are much more affluent. They have much larger home savings and home equity saved up, and they're looking for a larger type of house," Buck Horne, an analyst at Raymond James, said on CNBC's "Squawk on the Street." "The first-time buyer, unfortunately, remains pretty well locked out of the market."
The affluent buyers will be the primary targets of lenders operating outside the QM rules.
"We are going to offer over 43 percent, but the difference is we're going to want to make sure there is enough residual income that somebody does have the ability to repay," said Karen Mayfield, a senior vice president at Bank of the West. "Those people who are self-employed or who do have substantial income, there will be ways to justify allowing over 43 percent debt-to-income."
While Mayfield does not anticipate hiking rates for these borrowers, she does say the bank will underwrite the borrowers to the highest possible payment of an adjustable-rate loan.
"We really feel that we're just increasing the diligence involved in the underwriting but not necessarily increasing the risk, therefore we're not anticipating increasing rates that we're currently offering customers," Mayfield said.