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How Will Loans Change in 2014?

by Stephanie Sims

In fact, there are many Atlanta-area homeowners who have not refinanced their loans even though their interest rates were well above market. If rates remain below 5 percent — which may not be the case later this year or next year — and home values continue to increase, more homeowners who were unable to refinance in the past will be able to now, especially buyers who haven’t qualified for HARP.

New legislation will also affect the mortgage and real estate markets. Perhaps the most important piece of legislation to real estate agents is the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly known as “Dodd-Frank”). Its new regulations are likely to cause huge changes in the mortgage industry, which will have a massive ripple effect in the real estate market. Under this contentious act, banks will be issuing only “Qualified Mortgages” (QM), which are loans made for buyers that fit a number of specific criteria, such as: a 43 percent debt-to-income ratio; the limiting of the fee paid to banks providing mortgages at 3 percent of the principle; and the eight different criteria that reasonably guarantee the borrower’s “ability to repay.”

Those criteria are stated by the Consumer Financial Protection Bureau (CFPB) as the homebuyers’ “current or reasonably expected income or assets; current employment status; the monthly payment on the covered transaction; the monthly payment on any simultaneous loan; the monthly payment for mortgage-related obligations; current debt obligations, alimony and child support; the monthly debt-to-income ratio or residual income; and credit history.”

These standards aim to protect both consumers and banks while limiting predatory sub-prime lenders. Banks have been sustained by the government for the last few years, but 2014 will mark the end of that era, and mortgage rates will react accordingly. That is, they are projected to increase steadily throughout the year. In 2013, the mere discussion by the Fed to lessen its support of banks caused rates to increase.

Those new rules are helping create a safety net that has long been absent from the industry. Banks are protected from providing loans to unqualified buyers, and consumers are assured that banks are complying with a set of regulations that minimizes oversights. The Dodd-Frank Act created the CFPB, which provides that protection in the form of, most notably, Dodd-Frank’s ability-to-repay (ATR) and QM standards. There are hundreds of pages of legislation being implemented; homebuyers and agents must take care when deciding with whom to do business.

The standards set forth by Dodd-Frank will certainly make buying a home more expensive in 2014, but how much more expensive is still up for debate. The two largest factors that dictate current affordability are housing prices and interest rates. According to Pelarske, the question is mostly one of supply and demand.

“What we’ve seen is that the demand for housing continues to outstrip the supply. We’ve had a double-digit increase in [home] prices in many markets,” he says. “Homebuyers are going to be getting less ‘house’ for the same amount per month than if they’d bought in 2012 or 2013.”

However, the impact of slightly higher rates is a minimal one; a half a point increase in rates will not have a huge impact on affordability. There is not a big difference between someone buying a house at 4.5 percent and someone buying it at 5 percent. However, the higher the amount borrowed, the more impact the slight increase will have.

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