Tough mortgage rules could shrink borrowing by 20%

According to a new study, pending mortgage regulations could shrink borrowing by 20 percent and even affect the recent increase in home sales and construction.

American Action Forum’s (AAF) report shows the potential impacts of the new mortgage rules that are set to take effect next year, which are:

1. Higher bank capital standards
2. The “qualified mortgage” rule which requires mortgage borrowers to prove their capacity to pay or income and meet stricter criteria
3. The “qualified residential mortgage” rule that sets standards governing loans issued as securities.

With these new rules, American Action Forum states the cost of borrowing for home buyers is expected to rise. There will also be tight access to credit standards beyond pre-boom.

Although these rules are not yet finalized, experts are afraid that these standards won’t “return” to those that prevailed before 2001 or the housing boom. Experts said that it’s not surprising if these current tighter standards would become permanent.

Traditional Lending Tighter Standards

Over the past three years, banks have tightened up their lending standards, doing a series of affordability tests and requiring more proofs of income from borrowers. This is to largely address the threat of mortgage “put-backs” from investors.

AAF report concludes that a 14-20% reduction in loans will be expected in the coming three years if the lending standards of these financial institutions don’t moderate to at least the 2001 base level. And this, according to experts, would also affect the home sales by 9% to 13%. This foreseen shrink in housing may also cause a reduction in GDP growth of 1.1 percent.
Some experts added that while they may not guarantee 100% accurate figures, a reduction in home loans is certain if lenders don’t cut back on their standards.

More Lending Options

There are, however, other borrowing oppotutnities with lending companies emerging online. These companies, which have lenient standards, offer bad credit loans and many other types of loans for those who are in dire need for cash. The problem, however, is that these companies only offer small, or short-term loans which are paid back in one month or so. Thus, they usually do not offer borrowing for home purchase.