Middle Class ‘Chasm’ Increasing Due to Mortgage Regulations

Owning a home is primary value of the middle class. The mortgage regulations that went in to effect earlier this year are making it harder for many to get approved for home loan. Ironically, some of these regulations are supposed to ‘help’ consumers who may be considered higher risk. Just yesterday I heard someone say, “Sure the rates are good, but the banks just aren’t lending.”

The new ‘Qualified Mortgage’ classification makes it more difficult for those with a debt ratio ‘outside the box’ to obtain a mortgage. This often will include self- employed borrowers, those with unconventional income sources, or investors. Even if you have a perfect payment history on your credit report, high credit score, and high net worth- if your debt ratio is over 43%, you will likely still find it difficult to obtain a home loan.
The new ‘High Priced Mortgage Loan’ (HPML) classification makes it more difficult for those with less than perfect credit to obtain a mortgage loan. As of November 2014, the ‘prime offering rate’ for a 30 year first mortgage is 4.03%. A loan becomes restricted by HPML when the rate is over 1.5% more than the prime offering rate; which in this case would be 5.53%. Most lenders will price their loans according to risk. So if the lender’s risk-based pricing exceeds 5.53%, more than likely they would just decline the loan rather than be subject to the burdensome compliance requirements of HPML. In the past, you would be able to make an informed decision as to whether the rate and payment was worth owning your own home. Today, you would likely not have the choice to purchase a home without going to a sub-prime lender or finance company charging much higher rates.

Home ownership has been falling since the 2008 mortgage crisis. Many who were homeowners that lost their homes to foreclosure will likely not own another home, due to these stringent regulations. Consequently, in the last 24 months rental housing rates have been steadily increasing due to demand. Owning a home with a fixed rate mortgage loan helps owners ‘fix’ their housing expense, which is usually their largest monthly expense. This, coupled with the ability to build equity, can stabilize and elevate families into the middle class with steady income and reasonable financial management. This is becoming more difficult as potential homeowners, even slightly outside the box, are not able to qualify for bank loans to become homeowners.

This is a tragedy for the middle class and further increases the chasm between the lower and upper.

Practical solution: Support your local community banks and credit unions by utilizing their lending services. All lenders earn income from loans – when you need ANY loan; personal, car loan or home loan – do not go to a big bank or finance with the dealer (who will likely sell your loan to the bank). Support your credit union or local community bank; especially those who are portfolio lenders. Portfolio lenders have more flexibility in lending and will hopefully continue to provide home lending to all borrowers in their communities.

Without your support these smaller organizations may cease to exist. As in the holiday movie ‘It’s a Wonderful Life’ with the ‘Bailey Building and Loan’ gone we will all be forced to go to ‘Potter’s big bank’.