Pros and Cons of Qualified Mortgage Rules on Jumbo Loans
By: Rosemary Rugnetta | January 24th, 2013
Now that the Qualified Mortgage rules have been released by the Consumer Financial Protection Bureau (CFPB), there are a lot of questions as to the affect these will have on the mortgage industry. In general, many of the rules are already in place as lenders have become stricter since the housing crisis. Because the jumbo loan sector of the industry is different, there are pros and cons of the qualified mortgages rules with regard to jumbo mortgages.
According to the qualified mortgage rules, certain risky loan features are not allowed. Included in these are loan terms above 30 years, interest only payments, negative amortization and balloon payments, some of which are very popular features of jumbo loans. According to CoreLogic, a data and analytics company, approximately 14% of jumbo loans approved through October of 2012 had interest only features. Interest only loans allow borrowers to skip principal payments for a certain amount of time.
Another qualified mortgage rule that may affect jumbo mortgages is the total monthly debt payments which cannot exceed 43% of income. According to CFPB, around 15% of jumbo mortgages made last year would not be able to meet this criteria.
Wealthy borrowers who use jumbo loans are unique in their financial needs and planning. Many have plenty of cash and investments, yet it is difficult for them to document their income since many are self employed or own businesses. Some choose interest only loans even if they can pay outright for the home so that they can take the mortgage tax deduction.
While these new qualified mortgage rules may, in one way, have a negative impact on jumbo mortgages, there may be some positive results from their implementation. The secondary market for jumbo loans has been almost gone since the housing crisis began. These new rules may remove investor nervousness and questions about the jumbo loan sector which may eventually bring back the secondary market. An active secondary market for jumbo loans would help increase the availability and competition of these mortgages. As with all new rules, there are many questions still unanswered and clarifications that may need to be made.
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