Tighter rules for mortgage lending announced Thursday will go a long way toward protecting consumers against the worst excesses of the housing bubble, but could hit some Bay Area homebuyers in the pocketbook.
The rules are designed to prevent the types of toxic loans that allowed people to buy homes they couldn't afford. Those mortgages eventually collapsed, leading to the housing and financial crash.
The Bay Area, where housing prices are among the nation's highest, may feel the impact of one key guideline that limits the size of the loan payment compared with the person's monthly income and other debt. That will make getting a mortgage harder for some potential homebuyers.
"We do have a more expensive market, so for those people who are prevented from really stretching themselves, it will have an impact," said Chris Thornberg of Beacon Economics.
Under the new guidelines, the monthly mortgage payment plus all other monthly debt payments cannot be more than 43 percent of the borrower's monthly gross income.
Bill Godfrey of Mason McDuffie Mortgage in San Ramon said that could make it difficult for some high-income homebuyers in the Bay Area to get a loan that meets the new standards.
People who make enough money to live on but don't qualify under the 43 percent standard could have a hard time getting a mortgage. "It could mean some people in high-cost areas are not going to get their mortgage," he said.
Announced by the federal Consumer Financial Protection Bureau, the long-awaited guidelines will take effect next year but should begin shaping lenders' practices immediately.
Lenders applauded the consumer bureau for establishing clear standards, which may help ease credit in the future by encouraging banks to begin lending again.
"At least now we know what the rules are," said Rob Hirt, CEO of RPM Mortgage in Walnut Creek. "Most of the industry is applauding" because the rules will probably not slow down mortgage lending, he said.
"The fact that we have a rule focused on making banks make sure people are able to repay their loans shows how absurd things were in the last few years," said Kevin Stein of the California Reinvestment Coalition.
"This rule-making is setting some important new standards for insuring those kinds of practices do not re-emerge," said Paul Leonard of the Center for Responsible Lending in Oakland.
The new rules give lenders a "safe harbor" that limits their exposure to lawsuits from borrowers when they make what is called a "qualifying mortgage," which protects the borrower from some of the risky practices that helped cause the crisis.
"The safe harbor will give lenders the confidence to make qualified mortgage loans," said Dustin Hobbs of the California Mortgage Bankers Association. "That should help loosen credit."
For qualified loans, lenders must verify the borrower's financial information and establish that the borrower can repay the loan over the long haul. They can't use low "teaser rates" to determine whether a borrower has the ability to repay. Points and fees are limited to 3 percent of the loan.
The loan cannot have some of the tricky features of the housing bubble's toxic loans, such as negative amortization, excessive fees, balloon payments or 40-year terms.
Those types of loans can still be made by lenders, but they aren't qualified mortgages.
Loans that meet the guidelines of the government-controlled entities Fannie Mae, Freddie Mac and the FHA are presumed to be qualifying loans. Currently the three agencies account for most of the mortgage market.
The new rules, and others now governing the housing industry, will create a more standardized national mortgage market, said Hobbs of the CMBA. "For years, there has been more of a regional character and color to the industry. You're going start to see a more uniform nationalized look to lending."
Contact Pete Carey at 408-920-5419. Follow him at Twitter.com/petecarey.
new mortgage rules
Here are highlights of the new mortgage lending standards announced Thursday by the federal Consumer Financial Protection Bureau: