QM Rules Continued

As promised I am continuing to provide insights on the QM Rule changes that are coming next week. The good news is, it won't affect a lot of our clients who use Government backed loans such as VA or FHA.

In my research I found a really good, short and to the point post from another professional. I am going to share her post and give you a link to her site. I don't usually like to promote competitors sites but I think she did a really great job of simplifying the issue for us.

Here is what she posted on December 18th.

Qualified Mortgage Rule Changes – What You Need to Know

By: Selene Garcia

There has been a lot of news surrounding the latest mortgage rules (often referred to as “Qualified Mortgages” or “QM,”) which will be implemented January 10, 2014. These new rules, instituted by the Consumer Financial Protection Bureau (CFPB), are designed to protect you and hold lenders legally responsible for the loans they approve.

As a bit of background, the CFPB was established in 2010 as part of the Dodd-Frank Act; the financial reform bill passed and signed into law in the wake of the financial crisis. The Act itself protects consumers from deceptive practices in the financial and banking industries, including excessive fees and bait and switch tactics.

The CFPB’s job is to ensure federal consumer-related financial laws are executed. Some of the CFPB’s responsibilities include: drafting rules; overseeing financial institutions; sanctioning federal consumer protection laws; observing financial markets for inequitable consumer risks; bolstering consumer financial education; and examining consumer trends.

The most recent CFPB provisions governing mortgages, the Ability to Repay (ATR) and Qualified Mortgage (QM) rules, ensure that:

• Consumers are able to repay the loan for which they’ve applied:  If you’ve applied for a mortgage any time after 2008, you’ve likely noticed the increase in paperwork requested by your lender. Thefinancial documents requested are part of the “Ability to Repay” rule which states that every lender must take steps to confirm that consumers can reasonably repay the loan.

• Consumers will be qualified using 43 percent gross income versus 45 percent for non-agency and non-government loans: Debt-to-income ratios are used to qualify consumers for a mortgage – this percentage tells the lender whether or not you can afford the loan. The new requirement of 43 percent is a small change and equates to a minimal monthly payment difference. Let’s look at the math: using pre-tax monthly income of $50,000 per year and assuming no other major monthly debts, the maximum monthly mortgage payment (including taxes, insurance, assessments, and mortgage insurance) allowed under the qualified mortgage rules will drop from $1,874 to $1,791, or $83 per month. For most buyers, this means the total size of the loan they will qualify for under the new rules will be reduced by several thousand dollars.  

• Consumers are not being offered risky loans:  While there aren’t as many risky loan programs available today as in the past, the CFPB classifies some mortgages that include features such as: balloon-payments, interest-only, negative-amortization, and loan terms of more than 30 years amortization as “risky.”

• Consumers are not charged exorbitant fees:  The CFPB considers fees exorbitant when they exceed 3 percent of the loan amount for any loan over $100,000. For loans under $100,000 the percentage threshold is adjusted, as reasonable loan fees may surpass the 3 percent requirement for smaller loan amounts.

Moving forward, lenders will carry greater legal liability for those loans closed outside of the ATR/QM rules. Additionally, those loans which fall outside of the QM guidelines may become difficult to sell on the secondary market to lenders such as Fannie Mae and Freddie Mac. Ultimately, the new rules hold lenders legally responsible for ensuring consumers can afford their purchase and as a consequence, mitigating the risk of default.

Loans which fall outside of the QM requirements such as jumbo loans or loans which offer risky features like negative amortization or interest only options are not backed by Fannie Mae or Freddie Mac, and thus will need to be held in a lender’s portfolio.

There are several real estate-related loan types that will not be subject to the new ATR/QM rules, including:

• Second mortgages;
• Time share plans;
• Reverse mortgages;
• Bridge loans with less than 12 month terms; and
• Credit transactions secured by vacant land.

Some home buyers have expressed concern that the new rules will limit the ability to buy a house or choose a lender, but chances are you won’t notice the difference. Most of the loans made today—indeed, most loans made since the financial crisis—have not fallen far beyond the current QM rules. Some lenders will still continue to offer loans that do not meet the QM guidelines; however, it will likely require more documentation on the part of the buyer, since the lender will be taking on additional legal responsibility.

If you are currently shopping for a mortgage, or plan on purchasing a home in the near future, contact a mortgage professional to discuss the impact of the recent rules and how they might affect you.  

More information is available on the Consumer Financial Protection Bureau website. 

There is a ton of information on this subject and I will continue to look for simple explanations to help bring clarity to the matter.