Strict new rules designed to make sure that homeowners avoid mortgages they can’t afford and that lenders won’t face lawsuits from borrowers should their repayment go awry kicked in on Jan. 10. But despite those good intentions, the regulations are sparking concerns that squeezing the availability of credit will unsettle the housing market, especially in New York City’s outer boroughs.
The rules build on moves made by the Federal Reserve at the height of the foreclosure crisis to crack down on the willy-nilly lending that helped fuel the economic collapse. Codified in the 2010 Dodd-Frank financial reform, they require lenders that want the Federal Housing Administration to guarantee their loans to verify that borrowers can repay a loan according to its specified terms. To do that, the new Consumer Financial Protection Bureau created a new category, dubbed “qualified mortgages,” or QM, that follows a long-recognized rule of thumb for separating prime loans from subprime.
The new rules bar loans with negative amortization, interest-only payments, balloon payments or terms exceeding 30 years. “No-doc” loans also no longer fly, and among other restrictions, the borrower must have a debt-to-income ratio of less than or equal to 43 percent.
Still, some say the new debt-to-income ratio, which restricts a borrower’s debt payments to 43 percent of his or her income in an attempt to prevent difficulty keeping up, may be just enough to unsettle the New York City housing market. Before the crisis, those ratios sometimes got as high as 60 percent, and have since tended to max out around 50 percent, according to Rolan Shnayder, director of new development lending at the Manhattan-based H.O.M.E. Mortgage Bankers.
While most lenders aim for 45 percent, the mandated tighter ratio will make it harder for some New York City buyers to borrow as much as they want, said Malcolm Hollensteiner, TD Bank’s director of retail lending sales and production. “But I don’t think business is going to stop, credit’s not drying up. And we know at some point we’re going to see the emergence of a secondary mortgage market that buys non-QM loans from lenders. We just don’t know when or what it’s going to look like.”
The impact will be felt differently throughout the city.
The cash buyer reigns supreme in Manhattan, where the median condominium sale price hit $1.32 million in 2013’s fourth quarter, according to Douglas Elliman’s latest market report. Because prices are so high, the standards a buyer must meet to qualify for a purchase at all, let alone to secure outside financing, are already on par with the new QM rules, experts said. For that reason, the borough is less exposed than areas where home financing plays a bigger role.
“We know in Manhattan, you have loan programs where the minimum down payment is 30 or 40 percent, because of the sheer sales price, or maybe restrictions from a co-op board,” said Hollensteiner. “Where there’s more need for financing, when you go into markets where you have a higher percentage of FHA and [veteran] borrowers making no to little down payment, or borrowers obtaining conventional financing with 5 percent down, that’s obviously where the debt-to-income ratio can have a larger impact.”
Many multi-family buildings have their own standards for the types of financing they will accept. Co-ops will not accept FHA loans, and only about 8 percent of New York City condo buildings are FHA-approved, agency data shows. Furthering the pinch, the FHA lowered its maximum single-family loan amount for the region on Jan. 1 to $625,000 from $729,750 previously — which, of course, goes farther in some locations than others.
Queens has by far the most stock in the city that could be covered by FHA, with 154,393 single-family homes. The total amount of FHA lending corresponds with the type of housing found throughout the city. In 2013, Queens had the largest chunk of FHA loans, totaling $1.2 trillion. Manhattan had the smallest, with around $31 billion.
“I think as you move to the outer boroughs, the probability of impact would be heightened,” said Jonathan Miller, president and CEO of appraisal firm Miller Samuel. “I don’t mean significantly, but the drag on volume could be more than if there was no QM.”
But though the tighter rules could weigh down activity, they could help avoid another painful wave of foreclosures. In the subprime mortgage fallout in 2008, foreclosures leaped fourfold citywide, to 2,536, from 635 the year earlier.
Yet Manhattan came out with barely a scratch, with the number of completed foreclosures just 35 in 2008.
The crisis was most severely felt in Queens, where the number of foreclosures exploded to 1,575 in 2008, nearly six times the prior year’s 273.
The other boroughs also got hit hard.
•In the Bronx, foreclosures rose 233 percent, to 207 in 2008, from 62 in 2007.
•In Brooklyn, the number jumped 133 percent, to 401 in 2008, from 172 in 2007.
•In Staten Island, foreclosures nearly tripled, to 318 in 2008, from 116 in 2007.
Still, brokers remain characteristically optimistic for this year — with or without QM.
“What distinguishes most of the New York market, the Manhattan market, is that the buyers in this town have very deep pockets,” said Frank Russo, a broker with Halstead Property. “You’re not looking at people who have to be highly leveraged and don’t have assets and incomes or solid down payments.”
Even in the outer boroughs, where both incomes and home prices are more modest, widespread preparedness among consumers is likely to soften QM’s impact, experts said.
“I think that consumers are probably better informed on this topic than we could possibly imagine,” Hollensteiner said. “Consumers should not panic that credit is being pulled from them, that’s not the case at all.”
Other brokers go so far as to view increasingly stringent regulations as a boon that will only strengthen the year ahead.
“If there are red flags or grave concern, I haven’t seen it,” said Steven Goldschmidt, senior vice president of Warbug Realty. “If there are new lending rules that make for a stronger environment that stops the kinds of issues that plagued us four or five years ago, so much the better.”