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For 2014, the home mortgage industry is expecting higher interest rates, fewer home refinance loans and the rollout of new consumer protection rules from an agency that Congress created after the housing market meltdown.

Both home prices and the cost of borrowing likely will rise again next year, said Dustin Hobbs, a spokesman for the California Mortgage Bankers Association. But with the industry expecting a sharp drop in home refinancing, the state's banks, mortgage brokers and credit unions will be courting qualified borrowers.

"You're going to have a lot of good competition from lenders to get your business," Hobbs said.

Many local loan officers and bank officials say the home lending business has been strong for the past two years.

"Even now, there's still a demand for money," said Scott Sheldon, a senior loan officer with W.J. Bradley Mortgage Capital Corp. in Santa Rosa. He said he fielded seven requests for new loans in the week before Christmas.

However, the refinance market began to slow last summer and is expected to plummet in 2014.

The Mortgage Bankers Association predicts mortgage originations nationally will decline 32 percent overall next year to nearly $1.2 trillion. The association estimated that new purchase loans will increase 9 percent to $723 billion, but refinance loans will drop 57 percent to $463 billion.

Rising interest rates are the main cause behind the refi plunge. In June, the average rate for a 30-year fixed loan jumped above 4 percent for the first time in 20 months, according to Freddie Mac.

"The minute interest rates stop declining, then the quantity of refinances drops dramatically," said Otto Kobler, branch manager in Santa Rosa for Summit Funding.

Lenders also noted that most people who were interested in refinancing already have done so in the past four years.

For the week ending Dec. 13, the average rate for a 30-year fixed rate was 4.62 percent, according to the Mortgage Bankers Association. The group predicts rates to exceed 5 percent next year and to reach 5.5 percent by the end of 2015.

Lenders said they understand that borrowers prefer lower rates, but the coming increases still offer a silver lining.

"Rates are going up because they economy's doing better," said Tom Duryea, president and CEO of Santa Rosa-based Summit Bank. Though he's been in banking for more than 20 years, he said, "I've never been through such a long period of low rates."

The prelude to that period included a financial crisis that began in the nation's home mortgage industry.

In Sonoma County, one sign of the crisis was the plunge in home values. The median sales price peaked at $619,000 in August 2005, tumbled to $305,000 in February 2009 and ended last month at $450,000.

Another sign of the damage was the number of financially distressed owners who lost their homes.

Since 2007, more than 11,000 Sonoma County homes have been surrendered in foreclosure auctions. Another 4,000 homeowners sold their properties in short sales, where the sales price was less than the amount owed on the mortgage.

Together, that amounts to roughly one in every seven homes with a mortgage.

In response to the crisis, Congress in 2010 passed the Dodd-Frank Act, which among other things established a new agency, the Consumer Financial Protection Bureau. It was charged with preventing a repeat of the mortgage meltdown, with an eye on ending improper lending practices.

"For many years now, the American people have wanted to have someone stand on their side and help make sure they are not getting tricked into a bad mortgage deal," Rich Cordray, the bureau's first director, said in prepared remarks this month to the Consumer Federation of America.

Cordray said the bureau quickly focused on home mortgages, which he called the world's single-largest consumer finance market, valued at more than $9 trillion.

On Jan. 10, the mortgage industry will come under the bureau's new regulations, known as the Ability-to-Repay and Qualified Mortgage rules. Among other things, the regulations require lenders to demonstrate that a borrower has the income and assets needed to repay a loan.

A key provision for lenders is a category of loan known as a qualified mortgage. Lenders who make a qualified mortgage are presumed to have met the new regulations, giving them a "safe harbor" status should the borrower ever file a lawsuit.

To be deemed a qualified mortgage, the loan cannot have an interest-only structure or permit negative amortization, where principal increases even when the borrower makes the scheduled payments. Also, the loan period must be no longer than 30 years and balloon payments are generally not allowed.

Fees typically are limited to 3 percent of the loan's value. The borrower's debt generally can't exceed 43 percent of his or her pre-tax income, though loans acquired by government sponsored enterprises Fannie Mae and Freddie Mac may offer a slightly higher debt level.

Lenders differed on the impact of the new rules for consumers and the industry.

"For the most part we really don't see those changes affecting us or our members," said Cynthia Negri, executive vice president and chief lending officer for Redwood Credit Union in Santa Rosa.

Part of the reason is that lending regulations already have been significantly tightened in the past three years, requiring far more documentation from the borrower. Some said the new rules simply give more specificity for certain limitations.

"QM (Qualified Mortgage) is going to put numbers on that," said Ken Jones, manager for Stearns Lending in Santa Rosa. However, as a result of past changes, the lending process is "already about as hard as it's going to get."

Nonetheless, the new rules could make it more difficult for some consumers to obtain qualified mortgages for certain lending products, including construction, jumbo and other loans normally held in a bank's portfolio, said Dan Starelli, a senior vice president and regional manager for Umpqua Bank's home lending division in California and Nevada.

For example, the Federal Housing Administration on Jan. 1 will lower its maximum loan amount for Sonoma County to $520,950 from $662,500. With the new FHA limit set then at the same amount as Fannie Mae and Freddie Mac, consumers seeking larger loans will come under the tighter debt/income ratio of 43 percent.

Eventually demand is expected to create a market for nonqualified mortgages, banking officials said. But lenders are moving cautiously because such loans won't receive the safe harbor provision and because lenders must set aside 5 percent of the nonqualified mortgage on their books.

As such, Starelli said, Portland-based Umpqua has decided not to offer nonqualified mortgages.

"The risk is too high to open yourself to litigation and also to fill up your balance sheet with the money that has to be set aside in reserve," he said.

Santa Rosa's Exchange Bank does plan to continue offering one type of nonqualified mortgage, namely a loan with a balloon payment, said Colleen Oller, a vice president and home loan manager. The balloon payment loans make up a small part of business and will be kept in the bank's own lending portfolio rather than sold to a government sponsored agency or another lender.

Such a loan typically has a fixed rate and monthly payment for 15 years that is lower than a comparable 30-year-fixed mortgage. The balloon payment loan can save money for borrowers who don't intend to stay in the same home for 15 years.

"It's a perfect loan for them," Oller said.

In preparation for the new rules taking effect Jan. 10, banks have been training staff and trying to understand key details of the regulations.

Monika Besancon, the real estate loan department manager for Community First Credit Union in Santa Rosa, said last week she took part in a conference call with a national lender. Hundreds of loan officers were listening in, seeking to learn whether fees for such services as processing, credit reports, appraisals and notary public should be included or excluded in the new formula for calculating total allowable loan fees.

For the loan officers, the issue can determine what profit they can make on qualified mortgages — and whether they will be unable to make a profit on smaller loans.

For consumers, Besancon said, the new regulations are aimed at providing some uniformity so "you should be able to shop and understand how to compare."

You can reach Staff Writer Robert Digitale at 521-5285 or robert.digitale@pressdemocrat.com.

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