One of the major factors in the great recession and real estate crisis of 07-09 was the fast and easy access to cheap jumbo loans.
Mortgages come in two basic flavors, conforming and jumbo. Find out more about conforming loans here. Jumbo mortgages are loans that do not fit conforming loan limits or guidelines.
In an effort to not repeat history, Basel III reform measures were put into place starting this month.
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Basel III is a comprehensive set of reform measures designed to improve regulation, supervision and risk management within the banking sector. This was created in response to the credit crisis.
Banks are now required to maintain proper ratios and meet capital requirements. Basel III is part of the continuing effort made by the Basel Committee on Banking Supervision to enhance the banking regulatory system. It builds on earlier Basel documents and seeks to improve the banking sectors ability to deal with financial and economic stress while improving the risk management and strengthening the bank’s transparency.
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In a nutshell, Basel III is a set of guidelines, like conforming loan guidelines, to ensure the mortgage market does not return to the fast and easy lending practices of the early 2000’s.
Basel III ensures that all jumbo loans meet the qualified mortgage (QM) rule, as defined by the Consumer Financial Protection Bureau, and is designed to create safer loans by prohibiting or limiting certain high-risk products and features.
These include:
1. No excessive upfront points and fees. Points and fees must not exceed 3% of the total amount borrowed.
2. No toxic loan feature, which means no more:
- Interest only loans
- Negative amortization loans
- No terms longer than 30 years
- No balloon loans
Next the debt to income ratio, DTI, will be lowered from 45% to 43%.
Basel III is in effect as of January 2014. Please contact me if you have any questions about the new jumbo loan guidelines or real estate in general at americafoy@gmail.com.
If you have any other questions, or want to share your story, please reply to this post, contact me via my website, my facebook page, or on Twitter @AmericaFoy.
