In the week ending April 18, 2015, the House passed H.R. 650, the Preserving Access to Manufactured Housing Act. H.R. 650 makes helpful adjustments to Consumer Financial Protection Bureau (CFPB) regulations that govern mortgages commonly used to finance the most affordable homes, i.e. manufactured homes. The House also passed H. R. 685, the Mortgage Choice Act, which would exempt title insurance from the 3 percent cap on mortgage points and fees.
The Home Ownership Equity Protection Act of 1994 (HOEPA) defined what constitutes a high cost mortgage and what obligations apply to those lenders. HOEPA regulations were tightened by the CFPB to a degree that dissuaded some lenders from offering loans on the lowest cost homes, namely manufactured housing and mobile homes. Any retreat in mortgage availability for this class of homes removes the first rungs from the home ownership ladder for lower income families. Manufactured and mobile homes are the best opportunity in rural and less affluent areas of the country for lower income families to own a place of their own.
The H.R. 650 and H.R. 685 adjustments to mortgage regulations on low-priced homes will adjust regulations to a level that allows lenders to finance these homes in a manner consistent with the costs and risks they face. Borrowers with strong down payments, income and creditworthiness are usually able to obtain mortgages with low interest rates and modest fees. Families with weaker financial resources also want their own home, but they represent a higher risk to lenders and accordingly will face higher interest and fees. Prior to the H.R. 650 adjustment, HOEPA defined a mortgage as “high cost” if any of the following apply:
- A first-lien exceeds the applicable average prime offer rate (APOR) by more than 6.5% points, or by more than 8.5% points for a first mortgage less than $50,000 ;
- A subordinate lien exceeds the applicable APOR by more than 8.5% points;
- A transaction’s points and fees exceed 5% of the total transaction, or 8% for loans below $20,000, or if the fees amortized over the term exceed $632 per year; or
- A prepayment penalty persists for more than 36 months beyond the mortgage issue date or is more than 2% of the amount prepaid.
The issuer of a high cost mortgage incurs some onerous obligations that quickly drain the effective mortgage yield, especially from small loans (e.g. $20,000 to $60,000) for manufactured and mobile homes.
CFPB’s applicable regulations for high cost lenders include restrictions on balloon payments, restrictions on late fees and charges, lender responsibility for determining the borrower’s ability to repay (a complex assessment, contingent on assumptions about steady income and avoidance of calamitous medical costs, etc.), and other time consuming tasks such as financial counseling. After the borrower has received the lender’s good faith estimate of costs based on the Real Estate Settlement Procedures Act (RESPA), a counseling session conducted by a HUD certified counselor must review the implications of the RESPA as it applies to the borrower.
In H.R. 650, the House reduced the frequency with which these regulations would dissuade a borrower from offering to lend. To do that, the House altered the threshold for “high cost.” Instead of high cost starting at a first-lien of $50,000 with interest of 8.5% higher than average, it became $75,000 and 10%. Objections from the chronic anti-business members of the House arrived on schedule.
H.R. 650’s simple change will just increase the pool of willing borrowers, enable more new homeowners, and create more competition among lenders. Borrowers who were attractive to lenders under the old rates will still be attractive under the old rates – the change will not automatically increase home ownership costs to those borrowers. Rather, the change will provide solid bottom rungs on the new home ownership ladder.