Mortgage rates have been climbing higher all year, but for consumers getting ready to make the leap into homeownership, obtaining a mortgage from their local bank may soon be easier if a bill making its way through the Senate is signed into a law. According to a report by CNBC, the financial reform bill, which is aimed at easing some of the financial regulations put on the sector after the Great Recession as part of the Dodd-Frank Act of 2010, will make it easier for local banks and credit unions to offer home buyers a mortgage.
In an effort to better protect consumers from risky mortgages that played a role in the record foreclosures during the Great Recession, the Dodd-Frank Act created a so-called qualified mortgage, which means that lenders have to meet specific and strict requirements to receive legal protections if consumers claim down the road that they were sold a mortgage they didn't understand or a loan that was not appropriate for them. Some of the requirements included ensuring that a borrower's loan does not exceed 43% of his or her income, reported CNBC. Those restrictions shut many small banks and credit unions out of the mortgage lending market.
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The Senate bill would change that, letting small banks and credit unions obtain the legal protections without having to meet all the guidelines. They will still have to assess the borrower's financial resources and debt before issuing a mortgage. What's more, the bank or credit union is not allowed to sell the mortgage and cannot issue interest-only mortgages or those that have a balance that can grow over time. Those types of loans were to blame for the record foreclosures during the recent recession because borrowers could not keep up with the larger payments. Furthermore, keeping the mortgage with the bank instead of selling it means that the bank has to take on the risk and as a result will likely engage in a comprehensive underwriting process before approving a loan application.
For city dwellers or those living in metropolitan areas, getting a mortgage is not much of an issue since there are plenty of national banks easily accessible. But for borrowers in rural areas, relaxing these rules will have a more significant impact, said Richard Andreano, a partner at law firm Ballard Spahr, in an interview with CNBC. He said that big lenders tend not to operate in rural areas, making it hard to obtain a home loan if there isn't a local bank or credit union that can issue mortgages.
It's not clear if the bill will pass in the Senate or the House, although it has bipartisan support in the Senate. Senator Elizabeth Warren, a Democrat from Massachusetts who is against the reform bill, argued on the Senate floor late last week that there would be a financial crisis within 10 years if Congress passes the relief bill. She also said that the bill would result in a fresh round of government bailouts, reported The Washington Examiner.