We find ourselves in the middle of one of the greatest wealth transfer periods of all time. Those with wealth must decide whether they want to make transfers, and if they do, they must decide how much, to whom, when and in what structure?
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While that might sound like basic advice, it’s also the key to getting mortgage approval these days, after new federal mortgage lending rules went into effect Jan. 10 that require a potential borrower’s debt-to-income ratio to be not more than 43 percent. A potential borrower’s debt-to-income ratio measures the person’s monthly debts as a percentage of gross monthly income.
Area bankers say that the new rules may affect both the banking and residential real estate markets in the Boulder Valley in coming months.
The rules have served for years as informal guidelines for underwriters. Now that the rules
also have been formally issued by the federal Consumer Financial Protection Bureau, lenders who don’t follow them could face lawsuits from borrowers if they default on the loans down the road.
The new rules were issued by the Consumer Financial Protection Bureau to curb the loose practices that triggered a real-estate meltdown in late 2008 that that led to a national recession, according to information on the Federal Deposit Insurance Corp. website. The Consumer Financial Protection Bureau was created by Congress through the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Dodd-Frank has included numerous new regulations designed to tighten up banking standards.
It’s “probably not a bad idea” for banks to be required to follow the tightened-up mortgage lending rules, said John Rhoades, president and chief executive of Summit Bank and Trust in Broomfield. Summit Bank entered the mortgage business in late 2012, so its workers didn’t see as much of an impact from the recession as some others did in the industry, Rhoades said. The bank has four locations, including two mortgage underwriting offices in the Denver Tech Center.
“The market is picking up in this area, but the way loans are made and underwritten will make a difference,” Rhoades said “This regulation will make sure we don’t get carried away with (mortgage lending).”
Bankers at three prominent lending institutions in the Boulder Valley believe they’ll be able to increase their loan portfolio business to help potential borrowers who don’t meet the debt-to-income standard of the new rule. A financial institution’s loan portfolio is governed strictly by its own underwriting guidelines, which can be slightly more relaxed than the national rules, bankers said.
Lakewood-based FirstBank sees itself as one that can increase its loan portfolio, said Chris Evans, vice president of FirstBank’s Boulder market. The bank is looking to the region’s high number of home renters to become potential mortgage customers, since average rent prices are hovering around $1,000 per month, he said.
“We get to make a lot of our lending decisions right here out of this office,” Evans said.
At the same time, FirstBank employees will closely monitor the bank’s mortgage underwriting standards for all mortgages to be sold on the national market, Evans said. The bank has 11 branches in the Boulder Valley.
Some real estate investors may have debt-to-income ratios higher than 43 percent and still be considered creditworthy, Realtors said. Most self-employed borrowers — including entrepreneurs — also may have problems with the ratio, according to industry watchers.
That’s music to the ears of Gerry Agnes, president of Elevations Credit Union.
“That’s the beauty of the community-based credit union. We can just hold portfolio loans of our members, so it doesn’t change if we will lend or not,” Agnes said.
Overall, Elevations predicts that the regional mortgage loan market will slow down by about 22 percent in 2014 from the year before, with most potential refinancing of existing mortgage loans is already completed, Agnes said. At the same time, the home purchase market in the region is expected to pick up again this year, he said.
“We do have the ability to portfolio loans … . So the impact of (the new) regulations on other institutions inversely affects us,” Agnes said. “We have great relationships with Realtors and title companies and our 100,000-plus members that are loyal to us. That’s our recipe for success.”
Elevations has eight branches in the region, as well as a branch in Westminster and one in Loveland.
Wells Fargo Bank has plans to originate nonqualified mortgage loans to hold in its own portfolio as well, said Cristie Drumm, a Denver-based spokeswoman for the bank. Such loans ensure that “creditworthy borrowers will continue to have access to credit,” Drumm said.
At the same time, Wells Fargo bankers have always asked potential borrowers to provide “ample financial documentation” that they can repay their loans, Drumm said. San Francisco-based Wells Fargo & Co. (NYSE: WFC) has 14 branches in Boulder and Broomfield counties.