Banks taking a good look at rules requiring more mortgage scrutiny

A new round of mortgage regulations slated to take effect next January have area banks scrambling to make sense of upcoming changes.

Proposed Qualified Residential Mortgage (QRM) guidelines would require more stringent vetting of borrowers — banks would have to verify that borrowers were not more than 30 days past due on any debts, say, or that housing payments are no greater than 28 percent of a household’s monthly income. The Consumer Financial Protection Bureau issued the rules, which were stipulated by the Dodd-Frank financial reform bill, in January.

“This is a big deal,” said Roshan Alavi, senior vice president for residential lending at EagleBank. “All of these changes are making it harder and harder to lend to the customer.”

EagleBank has begun parsing QRM guidelines, and has hired employees to help make sense of new regulations. In the past 30 days alone, the Bethesda-based bank has added three staffers to its residential lending division, Alavi said.

As the requirements trickle down, local bankers say consumers may be required to fork over higher down payments. Proposed guidelines would require home buyers to put down at least 20 percent to receive the best interest rates on their mortgages. “Jumbo mortgages,” which are typically loans higher than $625,500, could require a 30 percent minimum down payment.

Many community banks in the area say they are still in the process of figuring out how they will affected by the guidelines, which are expected to be revised sometime this year.

“We’re not exactly sure how much of an impact it will have on us,” said Lynne Pulford, senior vice president of Sandy Spring Bank’s mortgage division. “On the surface, I don’t think it’s going to have a tremendous impact on how we do business.”

Mortgages that do not meet the guidelines would be subject to higher fees and interest rates, and banks would not be able to package and sell the loans to private third parties.

“This matters longer term because we need the private market to come back and provide credit to home buyers,” said Mark Zandi, chief economist at Moody’s Analytics.

Requiring institutions to keep loans that do not meet QRM guidelines on their books, the CFPB says, would force banks to think twice before issuing risky mortgages.

“It’s probably a little bit too early to tell, but banks will have to be a little bit more careful if they decide to go out of those guidelines,” said Chris Bergstrom, chief risk officer at McLean-based Cardinal Bank.

So far, the National Association of Home Builders and the American Bankers Association have spoken out against many of the measures, arguing that community banks may stop providing mortgages if the costs associated with new requirements become too cumbersome.

“The proposed QRM rule could deny millions of Americans access to safe, affordable mortgages,” said Gary Thomas, president of the National Association of Realtors. “Saving the necessary down payment has always been the principal obstacle for first-time home buyers and based on our own estimates, it could take more than a decade for a family with a median household income to save enough for a 20 percent down payment.”

Abha Bhattarai covers local banking, retail and hospitality for The Washington Post’s Capital Business section. She has written for The New York Times, The Wall Street Journal, Reuters and the St. Petersburg (Fla.) Times.
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