In the aftermath of the real estate bubble crisis, the government required federal regulators to increase and tighten requirement qualifications for potential home buyers in order to weed out risky candidates. The new “ability to repay standard” was part of the Dodd -Frank Wall Street Reform and Consumer Protection Act (Dodd -Frank Act).
But those same rules were so stringent, housing industry and consumer groups said, that they are preventing well-qualified potential candidates to be approved for new loans and consequently, slowing down the real estate market recovery.
“Latinos are one of those sectors mostly affected by these new regulations because of their non-traditional ways of earning income and lack of credit history in many cases,” said Gary Acosta, CEO and co-founder of the National Association of Hispanic Real Estate Professionals (NAHREP).
What’s at stake with changed regulation?
A 25 year veteran in the housing and mortgage industry, Acosta was recently appointed and currently serves on the inaugural consumer advisory board of the Consumer Financial Protection Bureau (CFPB).
“The CFPB makes sure that consumers are protected against unfair lending practices,” said Acosta to VOXXI. “Lenders are now required to do their due diligence and request enough documentation to prove that borrowers have the ability to repay.”
Loose underwriting practices by some creditors during the real estate frenzy included failure to verify consumer’s income or debt/income ratios. They also qualified consumers for mortgages based on “teaser” low interest rates with adjustable increases –in some cases, yearly jumps that made the loans finally unaffordable.
Terms in which subprime mortgage loans were approved –the “no-docs” and “no-income” verification type- were eradicated but the new regulation affected credit access to millions of families on the margin.
These rules included a double standard for qualification, the Qualified Mortgage (QM) rule, which provided prime rates for well-qualified buyers, and the Qualified Residential Mortgage (QRM) rule proposed in 2011 that not only had tougher requirements but also included a 20 percent down payment from a potential buyer seen as a “higher risk.”
“Latino families have non-traditional ways of earning income, cleaning houses, in cash weekend jobs, or selling things; very entrepreneurial ways but not easy to prove,” Acosta said. “Income levels for Hispanics are going up but in many cases, they have not accumulated enough wealth to be able to come up with large down payments.”
According to NAHREP estimates, 25 to 50 percent of Latino potential buyers might be in this fringe market that, although having ability to repay, cannot prove it according to the new regulations.
Changes in qualification still not enough
Under the pressure of organizations such as NAHREP, the National Association of Realtors (NAR), and other housing, lending and consumer groups, the six financial federal regulators –HUD, the Federal Reserve, FDIC, FHFA, OCC, SEC–finally agreed to match the definition of QRM with QM, aligning both proposed rules back in August.
But there still are other stringent standards –such as the “QRM+” alternative that requires potential borrowers to meet QM standards along with a 30 percent down payment– still in place and going in effect January 30, 2014.
“If approved, the new rules will be a setback for Latino potential buyers who are still looking and have not lost faith,” Acosta said. “With the house market in recovery, prices and rates have gone up, which together with these new requirements will be a challenge for Latino homeownership in the short run.”
Latino consumers can help themselves
In addition to improved regulations, Acosta believes Latino consumers also need to take responsibility to improve their decision-making process while ensuring that bad lending practices do not affect them.
He recommends doing a better job at keeping good records of their finances in order to qualify for better loans. “Even if they do not have a good credit history, many lenders will verify credit using documents such as rental payment history or utility payments,” he said.
Working with a good real estate agent that understands Latinos circumstances and, if possible, is bilingual also makes a difference in achieving good results. “Choose a real estate agent that is experienced and understands what happens in your family,” he said.
Finally, he urges families not to get discouraged if a lender does not approve them. “Shop around, shop online and don’t be afraid to work with non-traditional lenders such as community banks,” Acosta said.
“Families need to prepare and educate themselves, access the information that is out there and take advantage of all the resources available to guarantee that they are making the best decision for themselves,” he concluded.