U.S. Tightens Mortgage Lending Guidelines

A new set of rules intended to make U.S. mortgage terms clearer to borrowers recently went into effect and requires the final terms of a mortgage to be shown to borrowers at least three business days prior to the closing date. These guidelines come as part of the Dodd-Frank reforms geared toward combating the predatory lending techniques that contributed to the financial crisis of 2008.

Known as "know before you owe", the recently enacted guideline is intended to prevent American borrowers from making rushed decisions and entering into a mortgage loan without entirely understanding its terms. It's expected to safeguard borrowers from costly surprises at closing and prevent the so-called "bad players" from cutting corners. This, like other Frank-Dodd reforms, is enforced by the Consumer Financial Protection Bureau (CFPB).

While the most recent release of mortgage tightening guidelines intends to ward off the risky behavior that eventually led to the financial crisis, it comes at a time when the U.S. home ownership rate is at a 50-year low. Those with weaker credit scores face great difficulty getting a mortgage, and seeing the problems they face, young millennials are renting instead of buying.

According to a Deutsche Bank note, tightened mortgage guidelines are making it more difficult to get a mortgage. At the start of the year, mortgage standards were already at a tight level, and they tightened modesty in the first half of the year.The organization expects additional tightening to come as a result of the recent guidelines set by the Federal Housing Administration. In the note, Deutsche Bank analysts said they believe consumer lending standards are tight overall, especially when it comes to mortgages, which accounts for 67% of all consumer debt. They believe this will continue to have a negative impact on economic growth and contribute to lower-for-longer interest rates.

This is apparent in the average FICO scores for Fannie Mae and Freddie Mac mortgages. The average score increased to 750 in the first half of 2015, up from the pre-crisis era score of 720. In the second quarter, the average score was up to 689 from 682 in 2014. These scores suggest that mortgage brokers and banks are putting restrictions that are stricter than federal guidelines on their loan packages.

For the many people who can't get approved for a mortgage as it is, these circumstances make it even more challenging. Those who can't get a mortgage may pursue seller-financed homes, in which the seller can sell their mortgage note to a firm specializing in buying mortgage notes after closing the sale.