As of January 10th 2014, stated income loans are gone for good as another piece of Dodd-Frank takes effect. In addition, debt-to-income underwriting standards become a bit tighter.

According to Steven Hartstein at First Meridian, the loss of stated income loans will be minor, maybe 2% of loan activity. The greater impact will be on first time home buyers who may find it difficult to meet tougher standards. Anecdotally, it seemed like banks like EastWest and Cathay, US banks with Asian-American customer concentrations, seemed to be more active in the stated income category. So perhaps the new rules will have an impact on foreign buyers and expats.

In the interest of consumer protections, the Act also prohibits teaser rates, interest only, negative amortization, balloon payments, terms of greater than 30 years, and may have implications for reverse mortgages. It is however a little easier to refinance out of a riskier mortgage (like IO) into a more stable one (fixed rate) than it is to apply for a conventional residential mortgage outright.

Here is an interesting article highlighting that the majority of the rules in Dodd-Frank have not been finalized. The implication is that there could be more to come, though I would guess that the easy rules were done first, and the (politically) harder rules were deferred meaning that some may never see the light of day.

Below is my cheat sheet to the Act as it impacts mortgages. Here is an even better resource from the CFPB.

Dodd-Frank Act: Title XIV – Mortgage Reform and Anti-Predatory Lending Act

Subtitle A – Residential Mortgage Loan Organization Standards

•             A residential mortgage originator must be clearly identified

•             Can only be compensated based on the principal amount

•             Must verify the borrower’s ability to pay

•             Bans yield spread premiums

Subtitle B – Minimum Standards for Mortgages

•             Income verification is mandated

•             Qualified Mortgages – Regular periodic payments that do not increase the principal balance or defer repayment of principal. Points and fees less than 3% of the loan amount.

•             Qualified Mortgage + Ability to Repay create a safe harbor for the lender in foreclosure

Subtitle C – High-Cost Mortgages

•             Mortgages on principal dwelling where the interest rate is 6.5% higher than prime (or more), 8.5% for a second mortgage

•             Points and fees (excluding PMI) greater than 6% if the transaction is over $20,000

•             Pre-loan counseling from a certified counselor

•             Disallowing balloon payments, prepayment penalties, and encouraging default on an existing loan when refinancing

Subtitle D – Office of Housing Counseling

•             Creates an Office of Housing Counseling under HUD for consumer counseling on home ownership and renting. Track foreclosures on 1-4 family housing.

Subtitle E – Mortgage Servicing

•             Establish an escrow account for taxes, insurance, flood insurance, mortgage insurance, ground rents, and any other required periodic payments

Subtitle F – Appraisal Activities

•             Physical property visit

•             Required second appraisal if the first is over 180 days old or the current price is lower than the previous sale price

•             Who is a certified or licensed appraiser, conformity of appraisals

•             The use of Automated Valuation Models to create some consistency

•             Broker Price Opinions and HUD 1s

Subtitle G – Mortgage Resolution and Modification

•             Ensuring the protection of current and future tenants

•             Creating sustainable financing considering the rental income and adequate operating reserves

•             Maintaining federal, state, and city subsidies

•             Funds for rehabilitation

•             Facilitating the transfer of such properties

•             Home Affordable Modification Program servicers must provide data used in NPV analysis

Subtitle H – Miscellaneous Provisions

•             Reform Fannie and Freddie

•             GAO to study reducing foreclosures, rescue scams, loan modification fraud

•             HUD to study defective drywall

•             Funding Mortgage Relief and Neighborhood Stabilization programs

•             HUD to provide legal assistance for foreclosure related issues

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