Mortgage Smart Community Series – Mortgage Mayhem?

Owning a home in an association

After years of struggling through one of  the worst downturn in modern history, 2012 saw signs of recovery in the housing markets. Driven by low prices and historically low interest rates, home sales were up, foreclosures slowed and prices stabilized.  But these positive signs may come to a screeching halt in 2013 as new federal mortgage regulations become effective, and other federal mortgage financing agencies struggle with potential bailouts. In short, the rules for who gets a mortgage, for what type of home, in what type of community will be changing, and associations need to be ready for the impact.

In 2013, the federal government is required to finalize new mortgage regulations. The regulations are in two parts, Qualified Residential Mortgage Regulations (QRM) and Qualified Mortgage Regulations (QM). Combined, these regulations will impose new, stringent requirements on lending for any home or condo purchase. The QRM regulations deal with the type of mortgages that will be available and the QM regulations will set standards for a borrower’s ability to repay a mortgage.
Qualified Residential Mortgage Regulations
First, pending QRM regulations will impose sweeping changes to the type of mortgages available in 2013 and beyond. Required by the infamous Dodd-Frank Act, the QRM regulations set standards for the types of mortgages that will be available. Under the draft regulations issued by the federal government, QRM will set the following standard for mortgages:
A minimum 20% down payment will be required
Closing costs and realtor fees cannot be financed as part of the mortgage;
Any borrower cannot have any late payments on any credit account for the three years preceding the application
A study undertaken by the mortgage lending industry found that if the QRM regulations are imposed as drafted, it would exclude up to 70 percent of currently qualified buyers. Considering that lending standards have been tightened significantly since the housing crash in 2008, that number is cause for concern.
Qualified Mortgage Regulations
In addition to regulations on the type of mortgages available, pending QM regulations will impose standards on a borrower’s ability to repay a mortgage. Under the proposed QM regulation, banks will be required to not only look at the borrower’s ability to repay the mortgage and interest on a loan, but also their ability to repay other mandatory expenses associated with the mortgage. These expenses include: taxes, insurance and association assessments. This is arguably good news for home owners associations and condos as new buyers will be required to show they can afford assessments in the community in which they buy a home, something that banks have traditionally ignored.  That said, the information needed to determine what the association assessments are for the affordability calculation will likely be provided by the association board or management company. Under the regulation, if the bank relies on information about assessments from the association to make a loan, and that information proves inaccurate and the loan defaults, then the association can be held responsible for the expense of the defaulted loan.  A prospect that has many community association boards nervous.
Thus, despite signs of life, the housing market faces a serious set of challenges in 2013. The pending mortgage regulations will become effective at some point next year. The impact of the new rules will depend on if the federal government moves away from the stringent requirements found in the draft regulations issued last year. If so the impact on lending for community associations may be muted; if not, it will certainly be a whole new marketplace for home buyers and sellers.
Andrew Fortin
Vice President, Government & Public Affairs
This article was provided by Associa Living.