To get a mortgage with the lowest rate and fees, you'll have to make a 20 percent down payment if you're buying the house or have at least 25 percent equity if you're refinancing. And forget getting a good mortgage deal if you've been two months late on a credit card or car payment or house payment anytime in the last two years.
That's the gist of the mortgage rules that federal regulators will propose this week.
The Dodd-Frank financial reform law instructed regulators to define a "qualified residential mortgage," or QRM. The definition of a QRM is due by Thursday. A QRM is a plain-vanilla mortgage. For months, the mortgage biz has wondered how strict the definition would be. According to a summary that was leaked Monday night, the definition of a QRM is strict indeed.
If you want the lowest rates and fees:
- You will have to put at least 20 percent down if you're buying a home.
- You will have to have at least 25 percent equity if you're refinancing.
- You will have to have at least 30 percent equity if you're cash-out refinancing.
- Your house payments can't exceed 28 percent of your before-tax income, and your total monthly debt payments (house, credit cards, auto, student loans) can't exceed 36 percent of your before-tax income.
- You cannot have been 60 days delinquent on any debt payments in the last two years.
- You can't get a loan with "nontraditional features" such as negative amortization, interest-only payments or "significant interest rate increases."
I don't know what the regulators mean by significant rate increases -- specifically, if this rules out hybrid adjustable rate mortgages, such as 3/1 ARMs that have an introductory rate that lasts three years, then a rate that adjusts annually after that, subject to annual and lifetime caps.
Under the law, lenders will be able to buy, sell and trade QRMs freely, like kids trade baseball cards. But the marketplace will be less liquid for mortgages that don't fall under the QRM definition, because lenders will have to retain 5 percent ownership of non-QRM loans.
Imagine that mortgages were vehicles. In effect, the feds are encouraging dealers to sell slow, air bag-infested minivans to middle-aged customers. But if dealers want to sell fast cars, or if they want to sell vehicles to riskier drivers, they'll have to set aside 5 percent of each vehicle's price as compensation in case the vehicle is involved in a crash. Compensation to whom? I don't know. C'mon, this is just an analogy.
But think about what would happen if car dealers were regulated like that. Dealers would add surcharges on anything that's not a heavy, slow, boring minivan or SUV. You probably would end up with two categories of car dealers: "qualified" dealers who sell boring vehicles at low prices, and "cool" dealers who sell fun vehicles to riskier drivers at inflated prices.
On the sunny side, there's little likelihood of another housing bust under these strict QRM rules.