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Samia Cullen's Blog

Bay Area Silicon Valley - Mid Penninsula Market Activity and Trends

By Samia Cullen | Agent in Palo Alto, CA

How the New Lending Rules Will Affect Buyers and Sellers



The Consumer Financial Protection Bureau recently issued rules designed to reduce risky lending and require banks to verify that borrowers have the ability to repay their loans. The new rules require lenders to look at criteria such as a borrower’s income, employment status, credit history and other debt obligations. These criteria were largely ignored in the years leading up to the 2007 housing collapse.

When a loan meets new lending criteria outlined by the CFPB, it becomes a "qualified mortgage," which will give protection to the banks from lawsuits filed by aggrieved borrowers. A qualified mortgage is defined as a loan that does not have excess upfront points and fees, has no toxic features such as interest-only payments, teasers rates, negative amortization and balloon payments, and where the borrower does not spend more than 43% of his or her income to pay down debt.

The rules will encompass most lending institutions. The rules are already in effect, but lenders will have 12 months for full implementation. Buyers may have a few months left to try to get a loan from a lender that has not yet implemented the new rules.

Jumbo loans (loans above $625,000) will be particularly affected. Before 2010 about 75% of jumbo loans were highly leveraged non-qualified mortgages with debt well in excess of 43% of reported income. In addition many high-income borrowers with good credit scores took "interest-only" loans. Although the new measures do not set minimum down payment or credit score requirements, rumors are that lenders will require a 20% down payment on adjustable jumbo loans.

It is difficult to measure at this point the exact impact of the qualified mortgage rules on home prices in our area due to high demand, persistent low inventory and the fact that 30% of our buyers last year were cash buyers. Furthermore, in our expensive market some buyers may not be able to make the 20% down payment expected to be required for the popular adjustable jumbo loans. Fewer qualified buyers in a market lowers demand, and lower demand normally means lower home prices.

Information believed reliable but not guaranteed. Please contact a qualified lender for information regarding the new lending rules.

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