In Solomon’s Proverbs, and throughout the Bible, houses represent security, safety, prosperity and more. Fast-forward to today, and a house is part of the traditional “American Dream.” The Federal Reserve’s recent decision to keep its stimulus plan in place is intended to create the low interest rates that make that dream possible for more people – but some fear that new lending standards could have the opposite effect.
After months of hinting, then outright announcing, that it was time to begin tapering off on the monthly purchase of billions of dollars worth of mortgage securities, the Fed has now reversed itself, announcing that the plan will stay in place at its current levels for now. That could change – and has – at any moment, though, so a vastly diverse group of potential homebuyers are taking steps to secure a home –or homes — while interest rates stay relatively low.
But even as low rates aim to keep mortgages more accessible, new lending standards aimed at cleaning up widespread abuses in the mortgage industry may nip the home buyer dream in the bud for many applicants. The main reason? After the widespread abuses and wild run of subprime mortgages that led to the housing collapse of a few years ago, federal regulators and consumer watchdogs demanded – and got – tighter oversight of the mortgage lending process.
The end result was the Dodd Frank Act and other similar bits of legislation aimed at protecting mortgage applicants from themselves by casino creating more challenging standards for getting a loan in the first place. Enter the Qualified Mortgage Rule, a set of standards that established a higher debt to income ratio, higher income and credit requirements, and a larger down payment in order to qualify (as the Rule’s name says) for a mortgage.
These new standards were also intended to provide an incentive to lenders to play fair. Wracked by scandals and lawsuits stemming from the housing meltdown, mortgage lenders whose loans meet the standards of the QMR won’t face penalties for practices related to those mortgages. They will however be open to prosecution for risky –or fraudulent – loan practices that fall outside those parameters.
The downside, though, is that even as continued low interest rates keep attracting potential homebuyers to the market, the tighter lending standards are disqualifying many of them from actually taking advantage of those rates. One sticking point: the QMR’s requirement for a 20 percent down payment.
Recognizing that the borrower-hostile lending standards on one side were threatening o cancel out the borrower-friendly interest rates on the other, an active housing lobby composed of a diverse lot of advocates, real estate professionals and others pushed for – and won—a retreat on the 20 percent down payment issue.
For some activists, that’s not enough. Dropping the down payment issue, they argue, still leaves the higher debt to income ratio that presents so many problems fro struggling families. Even so, though, as the Fed-sponsored low rates meet the rollback in lending standards, homebuyers benefit. And for income property investors following Jason Hartman’s recommendations, decisions on both sides mean new opportunities for building wealth in income property. (Top image: Flickr/rieh)
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