Banking Law, Money, Real Estate, Student Loans

New Rules Make It Harder For Attorneys To Buy Homes

With nothing else to rank at the moment, U.S. News decided to try its hand at “news” and put out an article analyzing the expected fallout from the new mortgage lending rules coming down from the Consumer Financial Protection Bureau. The new rules are intended to stem the tide of future foreclosures by clamping down on profligate lending.

But all clampdowns leave people out in the cold.

To put this more directly: if you thought being a lawyer with good credit would put you in a position to buy your own home, you’re probably wrong….

The CFPB has proposed new lending rules that bar mortgages where overall household borrowing would exceed 43 percent of income. This is a significant clampdown from the mortgage policy employed prior to the housing crisis.[1] The market may not actually need this kind of cap given that banks have started to get a little stingy with their lending anyway. But the CFPB is betting that the banks are only hibernating and could flip back to making it rain on borrowers the next time the country hits a boom cycle, and the agency wants to set some hard-and-fast rules now before that happens.

Here are some of the categories of potential borrowers that the U.S. News article posits will have a harder time getting a mortgage under the new rules and the overall lending course correction:

• First-time homebuyers, especially those who are carrying college loans that count toward the debt limit.

Conditions should be a little tougher on first-time homebuyers. Someone coming straight from college to law school to first real job is not necessarily a good bet for the bank, no matter how much revenue and unblemished credit they can demonstrate. Let them prove they won’t blow that first lawyer check on recreating Scarface.

But the fact that college loans will count toward the 43 percent cap won’t just keep out the fresh-faced lawyer. You can do the math for yourself and see how long it would have taken (or will take) you as a newly minted lawyer to qualify for a mortgage. I worked in Biglaw during the boom years and followed an aggressive regimen of paying down my loans to a serviceable amount with my bonus money and it would have taken me a few years. For the rank-and-file law graduate, today it will be much tougher, with higher debt and fewer jobs out there.

• Those who lost jobs in the recession or have had career disruptions in the past five years. Verification of job history and employment standing are key requirements at a time when unemployment has been historically high.


• Small businesses or independent contractors whose incomes fluctuate, or people who have chosen to shift into lower-paying jobs. This is one of the fastest-growing workplace populations.

Thankfully no one in this industry has suffered layoffs. Or worse, having the whole firm disappear right out from under you.[2] Beyond the layoffs, though, there’s the changing model of legal work to deal with. Contract work is all the rage for most attorneys looking to make ends meet in this economy. Unfortunately for them, the bank may look dimly on an employment history speckled with temp agencies. Worse still, contract work is also expanding beyond its traditional place as a site for low-level review, and major firms are now hiring mid-level and even senior-level attorneys on a contract basis. These older attorneys make considerably more money than what’s traditionally considered “contract work” and may even function as quasi-permanent fixtures at the firm, but the status as a contractor could still spook a bank.

• Those who live in regions hit by Hurricane Sandy, which have experienced sharp increases in flood insurance. Second-home and rental-property buyers are already having trouble getting financing in many areas. Newly designated Quality Mortgages will encourage lenders to seek more kinds of mortgage and homeowner coverage.

Namely, the largest legal market in the country.

If you already have a mortgage and just took another sip of Scotch while laughing at the misfortune of your fellow attorneys, you may not be out of the woods either:

“It will tighten things further. The largest constraint is the 43 percent threshold,” says Sam Khater, senior economist at housing data provider CoreLogic. “It will hit more refinances than purchases because a lot of them use a high debt-to-income ratio.”

So get used to renting, lawyers![3] Sure it’s robbing you of a long-term investment and a nifty tax break, but when your sink starts leaking, take heart that you won’t have to do any of the repairs.

Tighter mortgage rules will soon squeeze these groups even more [U.S. News & World Report]

Earlier: The Chart That Should Make Everybody Doing On-Campus Interviewing Absolutely Freaking Terrified
Contract Attorney Problems

[1] Bank: “Do you have a pulse?”
Borrower: “I believe so.”
Bank: “Congratulations on your new home!”
Borrower: “Do you want to check my pulse?”
Bank: “Meh… I’m sure you’re good.”
[2] Dewey have to make this joke? Howrey much did you wager this footnote was going to feature these gags?
[3] As covered in the contract attorney discussion, firms have decided to “get used to renting lawyers!” FUN WITH COMMA PLACEMENT!

(hidden for your protection)

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