New Mortgage Rules Favor Borrowers — and Taxpayers

Mortgage borrowers are about to get more protections when financing real estate as a result of new rules for Fannie Mae and Freddie Mac.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, lenders can avoid virtually all liability by making what are called “qualified mortgages” or QMs. In basic terms, such loans include all fully-documented, 30-year FHA, VA and conventional mortgages which have points and fees that do not exceed 3 percent of the loan amount. Such loans are generally available with little down which makes them extremely attractive to purchasers, especially first-time buyers.

The results of the Dodd-Frank rules have been dramatic: Prior to the mortgage meltdown the typical foreclosure rate across the country was .4 percent. Then, with the creation of toxic loan products which were sold between 2000 and 2008, foreclosure rates soared.

With the introduction of Dodd-Frank standards the foreclosure level for loans made since 2010 has fallen to .2 percent for Freddie Mac and .1 percent for Fannie Mae according to Lawrence Yun, chief economist for the National Association of Realtors. Of course, lower foreclosure rates mean less risk and less risk means lower mortgage rates.

Now, under new rules announced by the Federal Housing Finance Agency (FHFA), the governmental agency that oversees Fannie Mae and Freddie Mac since they were nationalized, the two big mortgage buyers will no longer be able to purchase loans which do not meet basic QM standards.

The new rules — which go into effect January 10, 2014 — will protect borrowers by limiting the market for non-standard financing. Since most lenders have been following the QM standards since the passage of Dodd-Frank the directive from FHFA will not be a new regulatory hurdle.

At the same time the new FHFA directive will also protect taxpayers by assuring that Fannie Mae and Freddie Mac do not purchase loans with excess risk. So far, taxpayers have loaned $187 billion to Fannie Mae and Freddie Mac of which roughly $50 billion has already been repaid.

According to FHFA:

Beginning January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the “ability to repay” rule if the loan:

___ is not fully amortizing (meaning Fannie Mae and Freddie Mac will not purchase loans which require a huge balloon payment),

___ has a term of longer than 30 years, or

___ includes points and fees in excess of three percent of the total loan amount, or such other limits for low balance loans as set forth in the rule.

“Effectively,” says FHFA, “this means Fannie Mae and Freddie Mac will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule.”

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