Midstate financial institutions and real estate professionals said they don't anticipate having to adjust much when the federal government's newly issued "ability to repay" and proposed "qualified mortgage" rules take effect next year.
"I don't think that it's a big impact for us," said Tom Gillen, president of Susquehanna Bank's mortgage division.
The market could see "a modest amount of credit tightening," but it's hard to predict, said Rick Wargo, executive vice president and general counsel for the Pennsylvania Credit Union Association.
Last month, the Consumer Finance Protection Bureau, the oversight agency created under the Dodd-Frank financial reform law, released the rules, which run to hundreds of pages. Mortgages that conform to them will be considered riskless enough to qualify for a legal "safe harbor," shielding issuers from blame if they go bad.
The standards are intended to prevent the kind of lending that contributed to the housing bubble of the mid-2000s — minimal documentation of borrowers' ability to repay, complex loans that contained sharp interest rate increases or other time bombs in the fine print.
"When consumers sit down at the closing table, they shouldn't be set up to fail with mortgages they cannot afford," CFPB Director Richard Cordray said in a statement.
The rules will take effect next January. The ability-to-repay rules are final; the QM rules are a proposal and subject to revision, the CFPB said.
Local lenders already sell most of their mortgages in the secondary market, said Steve Olson, mortgage company manager at National Penn Bank. Such mortgages already must conform to strict standards and be documented thoroughly.
Most of Susquehanna's mortgages go into the secondary market, Gillen said.
During a transition period of up to seven years, loans qualified or guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration will be considered qualified. They account for about 90 percent of mortgages today, according to California research firm CoreLogic.
The pending CFPB standard, however, is somewhat stricter. About half of mortgage loans made today would not qualify under the new rules, CoreLogic said.
Of those that would fail, about half would do so because of the debt-to-income ratio test, which mandates a maximum ratio of 43 percent. Inadequate documentation would condemn another third, CoreLogic found.
That's looking at the whole nation, however. The midstate is much more conservative than places such as Florida and Arizona, where real estate lending was far riskier, said Don Roth, a Realtor with Harrisburg-area firm Prudential Homesale.
"Ninety to 95 percent of Realtors around here aren't going to have a problem with this," he said.
Olson said much the same thing: "It should be pretty much business as usual."
Roth said he would be more concerned about a down payment requirement. The rules released last month do not address down payments, but some proposals have recommended a 10 percent or 20 percent minimum. A 20 percent requirement "would knock the pins out from under the real estate market, in my opinion," he said.
Requiring qualified residential mortgages to have a 10-percent down payment would disqualify another 10 percent of the existing market, CoreLogic found. On the other hand, that requirement plus the QM rules "remove more than 90 percent of the risk," CoreLogic said.
As a whole, the rules "will have an enormous positive impact on future performance," it said.
Perhaps the greatest benefit to consumers of the QM rule is the safe harbor provision, said Jim Deitch, longtime mortgage banker and CEO of TeraVerde Management Advisors, the Lancaster County consulting firm he co-founded.
That may sound counterintuitive, since the provision protects the lender. But reducing lenders' legal liability makes them more willing to lend, and they can do so at lower cost, he said.
Lenders earn only a few thousand dollars on a typical home loan, he said. If they risk incurring high legal fees to enforce a contract, wiping out any profit, they will shy away from making the loan in the first place, he said.
Technically, lenders will be able to issue mortgages that fall outside the safe-harbor provisions, but they will have to be very confident the loan is sound. One issue going forward will be to see how tightly lenders "cling" to the safe harbor provisions, Wargo said.
There are some exceptions to the debt-to-income rule, but they are complex, creating potential for regulatory uncertainty, Deitch said.
The qualified mortgage rules make some exceptions for "rural lenders," allowing certain types of balloon payments that are otherwise prohibited. However, those rules are aimed at aiding small banks in underserved areas in the Midwest and West, not areas like the midstate that have better-developed financial markets, he said.
The bottom line, Roth said, is that it should be common sense for lenders to make sure their customers can repay their loans.
"I thought that's the way it always was," he said.
The Dodd-Frank law required the Consumer Finance Protection Bureau to strengthen federal Truth in Lending regulations, codified in what is known as Regulation Z. Beginning next year, mortgage lending will have to conform to the following criteria:
? Maximum debt-to-income ratio: 43 percent
? Maximum term: 30 years
? Maximum loans and fees: 3 percent
? Lenders must determine a borrower's ability to repay. In general, they must consider eight factors:
• Current or reasonably expected income or assets.
• Employment status
• The monthly payment on the loan
• The monthly payment for "mortgage-related obligations"
• The monthly payments on other loans owed
• Other debt, alimony or child support
• Debt-to-income ratio
• Credit history
? Lenders must use "reasonably reliable third-party records" to verify credit information.
? Negative amortization, interest-only payments and balloon payments are generally prohibited.
Source: Consumer Finance Protection Bureau