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Tighter Mortgage Rules Will Soon Squeeze These Groups Even More

Tuesday, September 3, 2013 - 5:31 PM
From US News and World Report:
Five years after the housing collapse, the new Consumer Financial Protection Bureau is closing the barn door on the loose lending that caused the crisis. But as homebuyers struggle to get financing for new homes, some critics fear the door could be permanently nailed shut for many people seeking affordable housing.

The new lending rules will limit people from taking out a mortgage or refinancing an existing one that puts their overall household borrowing at more than 43 percent of their income. That new debt cap also includes a wide swath of common forms of debt that count toward the total, including student loans, most fees and points related a home purchase, and property taxes. It also tightens rules on documentation, and lenders who improvise to give customers easier terms will be open to consumer lawsuits if the loans go bad.

Read more

According to the article, among the hardest hit groups will be retirees with adequate savings to finance home purchases or refinance, since lack of current income makes borrowing more difficult, and homeowners who wish to refinance but have lost some or all of their equity in the real estate bust.

The rules will become effective 1/10/14.
2
pearlbrownpearlbrown1,436 posts since
Nov 2, 2010
Rep Points: 6,261
1. Tuesday, September 3, 2013 - 8:23 PM
Can't imagine even wanting to retire and not be debt free. As far as a refi while under water I think that it should be done. It can only help the person and the lending institution saving them both and nearly $70,000 a foreclosure can cost the institution.

I can remember when 20% down payment for a home was the norm unless it was a VA or FHA but then closing costs were so high. I can remember banks telling the borrowers to ask their parents for the rest of the 20% downpayment if they didn't have it all. Also the norm was one house payment with taxes and insurance included was to be no more than one weeks take home pay. Cannot imagine 43% of take home pay or income going to debt. 
2
Ally6770Ally6770912 posts since
Jan 16, 2010
Rep Points: 2,655
2. Friday, September 6, 2013 - 2:43 AM
Rosie, the point of the article are the unintentional consequences of these highly restrictve rules promulgated by the Consumer Protection Agency. I know you're defender of the agency, but if they are going to make it harder for creditworthy retirees to refinance by taking away any flexibilty to provide for their unique circumstances, then we have an agency run amok. Govt agencies are usually well-intentioned, but by trying to micromange a particular industry they sometimes end up doing more harm than good.
2
loulou544 posts since
Aug 3, 2010
Rep Points: 3,397
3. Friday, September 6, 2013 - 9:32 AM
No one should have over 43% of income going to debt. It is unsustainable in a most circumstances for any period of time. The article said retirees had savings but did not have the income for payments. I think that paying down debt so that less than 43% of income is going to debt before borrowing more. Home expenses with utilitilities, lawn work and home repair can expensive and if 43% of income is already going to debt what kind of position are you putting these seniors in. With places like Pentagon Federal that have no closing costs for HE loans up to 20 years for up to 80% of home value would be the way to go if they qualify. Why pay for closing costs, appraisals etc. If it is only 5 years that they need the money it has now gone up to 2.74% and up to 20 years is now 3.99%. If with these rates they would still use more than 43% of income I would think they should think of selling or using savings to get payments down. If they have savings, borrowing for a long time especially using 43% of income in not a good idea. If they have a high interest rate maybe a refin with these lower rates would make their debt to income ratios better. 

From the article ---

"Retirees with adequate savings to finance home purchases or refinance. Lack of current income makes borrowing more difficult.

 
1
Ally6770Ally6770912 posts since
Jan 16, 2010
Rep Points: 2,655
4. Friday, September 6, 2013 - 10:12 AM
I totally disagree with you Rosie. If a senior has considerable assets, much of it in retirement accounts and in tax exempt investments, that should not be a reason to disqualify this person from refinancing his/her house. This person is not in danger of defaulting on the loan, and real people at a financial institution who best understand the particular financial circumstances of this person are best able to determine eligibility, rather than a huge remote bureacracy which attempts to promulgate rules for everyone without taking into account individual circumstances. People aren't just statistics and human intervention should not be eliminated for some overly broad formula which cannot possibly treat everyone fairly.

This is the problem I have with this agency and most other govt bureacracies. In their attempt to regulate our lives, they end up causing people more grief and aggravation trying to jump through the myriad of incomprehensible hoops they impose on us.
2
loulou544 posts since
Aug 3, 2010
Rep Points: 3,397
5. Friday, September 6, 2013 - 10:44 AM
Would you lend money to someone with substantial assets in retirement accounts that had over 43% of their income already going to debt even with a refi. If you will have less than 43% of income going to debt after a refi then you are not disqualified. A lending instituion is not allowed to count retirement accounts as collateral.  So if most of their assets are in retirement accounts that would have no bearing on the loan. The person could spend down their assets for Medicaid purposes (yes there are people like that) they can get dementia and have family, friends or scammers take their investments.  To put a senior or anyone in debt over 43% of their income is not a good idea. If my children, parents etc were in trouble I think I would help them out rather than have them in debt for a long period of time and getting them more than 43% of their income in debt. But understanding that most likely you would never see that money again. Like I stated before there are so many ways to get short time loans. If they need a car there are loans up from .49% to .74% out there. They also have their investments. There are HE loans to pay off their mtg from 2.99 to 3.99 up to 80% of value to help them get below 43% of debt to income ratio. These HE loans have no fees, closing costs, appraisal fees etc and are easy to do. These rates are comporable to a home mtg rate. They can use their tax free investments or retirement accounts to help pay down debt. We can help the seniors live within their means. Getting more in debt is not helping. A refi is helping and we can help them with that. 
1
Ally6770Ally6770912 posts since
Jan 16, 2010
Rep Points: 2,655
6. Friday, September 6, 2013 - 11:04 AM
Rosie, if someone had $5 million in retirement accounts and in other tax-exempt assets, I would allow the applicant to refinance regardless of reportable taxable income on the tax return. These are idiotic rules if they cannot be modfied to fit the unique circumstances of people who don't fit into the nice round boxes constructed by some bureaucrat in Washington DC who is clueless.
2
loulou544 posts since
Aug 3, 2010
Rep Points: 3,397
7. Friday, September 6, 2013 - 11:10 AM
No lending institution can count retirment accounts. The accounts have NEVER been allowed to be used as  colateral. This is not a new law. 
1
Ally6770Ally6770912 posts since
Jan 16, 2010
Rep Points: 2,655
8. Friday, September 6, 2013 - 11:11 AM
Wrong. I know from personal experience! Under the old rules, banks were allowed to consider assets in addition to income, including retirement accounts. One can have income, that exceeds the income thresholds, from retirement accounts and tax exempt assets (municipal bonds) which under these crazy rules will not be considered for some stupid reason.
1
loulou544 posts since
Aug 3, 2010
Rep Points: 3,397
9. Friday, September 6, 2013 - 11:47 AM
I meant IRA's when I said accounts.

IRS publication 590 provides detailed information about IRAs, including prohibited transactions. Prohibited transactions for IRAs include that money cannot be borrowed from an IRA nor can an IRA be used as security for a loan.
But just found this
Pension annuities are either qualified or non-qualified and a DB annuity is not owned by the retiree and cannot be used as collateral. You might be able to sign a paper to give your monthly payment to a lender for so many years but don't believe this is legal by a bank or credit union. But to use the pension or IRA for collateral it is not legal. Not sure what other type of retirement their might be. Those were the only one that I worked with. I have heard of military retirees signing over their monthly payment to someone and it ended up being over 30% interest. Unlawful rate of interest.

Using an annuity as collateral for a loan Using your deferred annuity as collateral for a loan may result in the unwanted realization of taxable income to you. For instance, say the basis (premiums paid) in your annuity is $100,000 and it's now worth $150,000. If you use this annuity as collateral for a loan, the collateral assignment is treated like a distribution and all of the gain (i.e., $50,000) will be taxable to you as ordinary income.

The income tax rules for deferred annuities can be tricky, so before making any ownership or beneficiary designation changes, consult your financial or tax professional.
1
Ally6770Ally6770912 posts since
Jan 16, 2010
Rep Points: 2,655
10. Friday, September 6, 2013 - 12:25 PM
Rosie, I never said anything about annuities. If you have (let's say for the sake of argument) $5 million in a 401k and other IRA accounts and you are over 59 1/2, you are allowed to take that money and use it for any purpose you think is reasonable, like paying monthly mortgage payments. It's ridiculous that the the CFPA will not recognize the income in these accounts. How is it any different than a defined benefit pension plan where that income is considered fine? Also, don't forget income from municipal investments. Why is that any different than income from taxable investments like CDs or even employment wages?
1
loulou544 posts since
Aug 3, 2010
Rep Points: 3,397
11. Friday, September 6, 2013 - 12:59 PM
Defined Benefit accounts cannot be used as collateral because you don't own them. You only can count the income as with any other type of income like from your RMD etc. If you have income from them that can count just cannot be used as collateral.  Any type of income is counted. The home can be used as collateral but if your debt to income from all sources is more than 43% than you cannot have the loan. When we got our first loan it was 30% debt to income ratio. Not sure if it was the savings and loan we went to or law. We qualified for $150 but the payment for a 30 year loan for our home was $65 with interest, taxes and insurance  and we paid it off in 6 years. 
1
Ally6770Ally6770912 posts since
Jan 16, 2010
Rep Points: 2,655
12. Friday, September 6, 2013 - 1:13 PM
Rosie, I think Lou is right concerning retirement accounts.  We could not even get to rent our apartment unless we showed good collateral and they insisted on all retirement accounts also.  If a retiree wanted to buy a home why would they need to finance it in the first place?  I certainly would not start paying interest again.  I would just pay cash for the home and consider it ours.  Money is money and I don't think most banks care where we keep it as long as we have access to it.   I have never had a problem with showing our IRA accounts when we had to prove our net worth. 

Maybe they have changed the laws on IRAs recently but I have never had a problem showing IRAs as a resource or collateral especially after reaching 59 1/2.  I think the main point is that one has to show one has access to it if a need arises.  I remember after Katrina hit, they allowed people in the hurricane path to cash in their IRAs for special  cause without a penalty no matter how young they were. 
1
paoli2paoli21,372 posts since
Aug 10, 2011
Rep Points: 6,011
13. Friday, September 6, 2013 - 1:43 PM
Showing IRA's for net worth or showing all retirement accounts for net worth is one thing  but IRA's cannot be used as collateral in getting any loans. IRA's cannot be used as collateral. 

IRS publication 590 provides detailed information about IRAs, including prohibited transactions. Prohibited transactions for IRAs include that money cannot be borrowed from an IRA nor can an IRA be used as security for a loan.

A DB plan cannot be used for collateral. You do not own it. 
1
Ally6770Ally6770912 posts since
Jan 16, 2010
Rep Points: 2,655
14. Friday, September 6, 2013 - 2:16 PM
Rosie, you're are not reading my posts. I never said anything about using IRA's for collateral. I am talking about the income earned inside your IRA being available to make mortgage payments. There is no reason why this should be treated any differently from any other income. (such as income from a defined benefit plan).

 

PS. Banks are allowed to consider assets presently, not so under these new rules.
1
loulou544 posts since
Aug 3, 2010
Rep Points: 3,397
15. Friday, September 6, 2013 - 2:50 PM
Income from from a DB is a check received each month. If the person was not receiving the check it could not be counted as income.  Do you have income received each month from your IRA? Income is what is counted. If you have income received than that is income. If it is sitting inside an IRA it is not monthly income received and will not be counted as income. It would be counted as net worth.  Everything I have read has said taxable income, but I don't think that would apply to seniors as some beneifits are not taxable in some states.  Banks cannot attach your social security check either. DB's are not treated any differently than IRA's as far as income. If you received it than it is income. 
1
Ally6770Ally6770912 posts since
Jan 16, 2010
Rep Points: 2,655
16. Friday, September 6, 2013 - 3:11 PM
If you don't mind me saying this, you're repeated explanations for why we should rely upon a simplistic formula to determine eligibility for financing for millions of people is precisely why we need the human element to interpret the nuances of a individual's financial statement , not some brilliant bureaucrat in Washington DC.

If I automatically set a specific amount to be distributed from my earnings in a IRA account every month, that is not different than a pension check.
1
loulou544 posts since
Aug 3, 2010
Rep Points: 3,397
17. Friday, September 6, 2013 - 3:39 PM
Lou I just called a PNC bank mtg lender. IRA income is treated no differently then income from a DB pension. Call PNC if you were turned down, or try another place for your loan. You have to be able to show proof of income. If you cannot then it is a different situation. 
1
Ally6770Ally6770912 posts since
Jan 16, 2010
Rep Points: 2,655
18. Friday, September 6, 2013 - 4:41 PM
Rosie, I don't want to pursue this too long, but under the CFPB rules, a bank will need to look at your 1040 adjusted gross income for the last two years and is forced to ignore income from municipal and retirement assets (undistributed retirement income), which is why one formula cannot fit every conceivable circumstance in the universe.

Look, it doesn't matter what I think. The people have voted and seem to want a paternalistic govt to micromanage their lives and hold their hands everytime they need to make a financial decision. I personally do not like it and prefer to make my own decisions without the heavy hand of the govt. For instance, I currently have an interest-only 7-year fixed rate mortgage that will begin to amortize in the 11th year. Under these rules, this type of loan is forbidden. It is infuriating that the govt is going to deny me access to the type of loan that best meets my needs.
1
loulou544 posts since
Aug 3, 2010
Rep Points: 3,397
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