What Do the Changing Mortgage Rules Mean for Lenders?

The real estate market in the US has started recovering from the subprime lending crisis. Now mortgage executives are preparing to deal with a new mortgage business model that places special emphasis on protecting the interests of borrowers. In order to deal with the change in the lending landscape, lenders have to modify their business models. This requires making adequate changes in the underwriting process and employing highly advanced information technology. The goal is to improve the borrower's buying experience. The lender also needs to standardize processes and procedures.

New mortgage rules require the lender to comply with stricter regulatory guidelines. That means the lender now has to adhere to the spirit as well as the letter of the law. This requires developing a customer-centric lending model that complies with GSE underwriting guidelines, consumer protection and banking institution safety. This will not be possible if the technological and organizational infrastructure do not evolve, innovate, or compete.

The federal government now expects lending institutions to consider consumer experience when they deliver financial services. Failure to do so may result in hefty fines and penalties.

How to comply

Lenders now need a team of well-qualified risk analysts, legal consultants, process engineers and consumer advocates to ensure that they comply with the guidelines. In order to keep all employees informed, lending institutions may need to conduct comprehensive training programs. This also requires significant investment in IT infrastructures.

Changing underwriting norms

Before making the loan, the lender has to assess the borrower's current and future capacity to repay the loan. In addition, the lender is not allowed to make a loan to a borrower who cannot afford it. It is not hard to see that in its bid to protect consumer interests, the government is effectively denying financing to a section of borrowers who do not have a reliable source of income to qualify for the mortgage.

Refinancing loses demand

Another development is the reduced demand for refinancing. This is forcing lending institutions to change the mix of products they offer. While refinancing products were quite popular in 2012 and 2013, they have fewer takers now.

Refinance volume is likely to drop to around 388 billion USD in 2014. In 2013, the amount was 967 billion USD. To deal with the decreasing demand for refinancing, lenders are shifting their focus to jumbo lending, reverse mortgage lending and money loans.

Lenders now watch consumers and catalog the products they make to ensure that they are prepared to compete in areas where borrowers are seeking financing.

The lender has to change their mix of mortgage products to match the changing market. The market is shifting from refinance business to purchase money transactions. In addition, many purchase money borrowers now seek jumbo financing. The slowly improving economy and Federal government policy changes are driving the demand for jumbo loans. Consumers, too, are seeking larger homes.

Reverse mortgages

The aging population is fuelling the demand for reverse mortgages. These products have matured over the years and consequently older adults are increasingly looking at this option to fund their retirement years. Lenders who do not have a trained staff to originate these new products many either recruit more staff or outsource the origination work.

Conclusion

The biggest changes that lenders face today are the focus on the consumer and the need to offer a new mix of mortgage products driven by a number of economic factors.

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Jumbo Loans are Becoming Easier to Get

Jumbo loan rates have dropped to level at or below those of conventional mortgages for the first time in more than 20 years. Typically, a jumbo rate will generally run about one quarter to one half of a point higher than the current rate for a conventional loan. Lenders are changing their way of thinking however, as they begin searching for business from the nation’s wealthier customers.

Wells Fargo began this trend in 2013 when they dropped the typical minimum down-payment from 20% to just 15. Competitors have begun to follow suit with some experts noting that it was a good time to e a jumbo loan borrower. The big banks are the ones who will have the best rates, and borrowers are going to need a minimum 720 credit score to qualify for the money.

Jumbo mortgage rates are averaging right around 4.25% as compared to the typical 4.35% being sought for the 30-year-fixed conventional loan. Those who are seeking a ARM loan can find rates around 2.875%, but borrowers should do so only if they expect to move from the property during the 5-year-fixed period.

Because of the rebound of the housing market, loan origination and approval rates are on the rise, and investors are starting to turn their eyes to the jumbo mortgage sector.

Jumbo Loans are Easier to Obtain

According to financial experts, people that had less than a 740 credit score could not get a jumbo loan, but that’s all changing now as opportunities for obtaining jumbo loans are starting to crop up for credit scores at the 720 level or in some cases, even lower. That doesn’t mean that jumbo loans are extremely easy to get these days, but rather the borrower must have a credit record that is fairly clean as well as a significant savings accounts that are perhaps larger than what would be required of the borrower looking for a conforming loan.

While a jumbo loan is considered one that is larger than $417,000 in most areas, they may start above $625,000 in areas where costs are high. To help entice borrowers to seek these loans, banks like Wells Fargo have lowered the 20% requirement to just 15%, and it doesn’t hurt of course that the interest rate is a bit lower than the typical conventional loan. Another plus for the borrower, is that while most loans with less than 20% down require mortgage insurance, those at 15% under the new terms do not.

Second homes are Easier to Buy

Let’s not forget about the terms surrounding the buying of second homes that have eased as well, so there is a lot of incentive for a borrower to look more closely at the jumbo loan packages that are available to them. Because of the expansion of the guidelines, loans that were once amounting to 70 or 75 percent loan-to-value are now being granted at the 80 percent level up to and including $2 million on second homes.

To put things into perspective, only 16 percent of the total number of borrowers who applied for a jumbo loan in 2012 have been denied access to that money according to LendingPatterns.com while previous to that the denial rate was as much as 30% or more. It seems that the reason behind the trend of more approvals in the jumbo sector is that lenders are now more confident about the values of homes. This is especially true for the houses at the upper-end of values.

It’s the stability of the real estate market that is now driving up the desire of borrowers to buy move-up homes. Because of that, lenders feel more comfortable in loosening up the purse strings.