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.

Attention Realtors---Must Read Post

Attention Texas Real Estate Agents! This post is for you and I would encourage you to become familiar with the changes coming up that will affect your business. You can count on Security National Mortgage to continue to educate you about the changes as they take affect in 2014 and as they are modified in the months to come.

What is the general ATR (Ability To Repay)

standard?

Under the general ATR standard, you must make a reasonable, good-faith determination before 

or when you consummate a covered mortgage loan that the consumer has a reasonable ability to 

repay the loan. 

What are the eight ATR 

underwriting factors I must 

consider and verify under the 

rule?

A reasonable, good-faith ATR evaluation must include eight ATR underwriting factors: 

1. Current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan 

2. Current employment status (if you rely on employment income when assessing the consumer’s ability to repay) 

3. Monthly mortgage payment for this loan. You calculate this using the introductory or fully-indexed rate, whichever is higher, and monthly, fully-amortizing payments that are substantially equal.

4. Monthly payment on any simultaneous loans secured by the same property 

5. Monthly payments for property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent.

6. Debts, alimony & child support payments. 

7. Monthly debt-to-income ratio or residual income, that you calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income 

8. Credit history, the rule does not preclude you from considering additional factors, but you must consider at least these eight factors. 

How do I determine ATR?

Our organization is responsible for developing and applying its own underwriting standards and 

making changes to those standards over time in response to empirical information and changing economicand other conditions. Implementation Tip: When determining ATR, you have to verify only the income or assets used to qualify the consumer for the loan. Implementation Tip: When the consumers’ applications list debt that does not show up on their credit reports, you must consider that debt in assessing either the consumers’ 

debt-to-income ratios or residual income, but you do not need to independently verify that debt.  17 

To help your organization incorporate the ATR concepts into its operations, the Bureau has prepared some examples that illustrate how your internal policies can influence your ATR determinations. 

The list below is not a comprehensive list of all the ways your underwriting guidelines might measure ATR. 

Each of you must look at the issue of ATR in the context of the facts and circumstances relevant to your market, your organization, and your individual consumers. Given those caveats, here are some of the types of factors that may show that your ATR determination was reasonable and in good faith: 

 Underwriting standards: You used standards to underwrite the transaction that have 

historically resulted in comparatively low rates of delinquency and default during adverse 

economic conditions. 

 Payment history: The consumer paid on time for a significant time after origination or reset of an adjustable-rate mortgage. Among the types of factors that may show that your ATR determination was not reasonable and in good faith: 

 Underwriting standards: You ignored evidence that your underwriting standards are not effective at determining consumers’ repayment ability. 

 Inconsistency: You applied underwriting standards inconsistently or used underwriting 

standards different from those you used for similar loans without having a reasonable justification. 

 Payment history: The consumer defaults early in the loan, or shortly after the loan resets, 

without having experienced a significant financial challenge or life-altering event. 

The reasonableness and good faith of your determination of ATR depends on the facts and 

circumstances relevant to the particular loan. For example, a particular ATR determination may 

be reasonable and in good faith even though the consumer defaulted shortly after consummation 

if, for example, the consumer experienced a sudden and unexpected loss of income. 

If the records you review indicate there will be a change in the consumers’ repayment ability after 

consummation (for example, they plan to retire and not obtain new employment, or they plan to 

transition from full-time to part-time work) you must consider that information. 

Ok that is enough for today! I will be posting pieces of the rule between now and the end of the year. I don't expect you to remember all of this so you can refer to http://files.consumerfinance.gov/f/201310_cfpb_atr-qm-small-entity_compliance-guide.pdf for the complete rule. As ammendments come out I will try to stay on top of those here as well. 

You can expect some lenders to get even more picky and careful about accepting income verification and making exceptions on Debt Ratios. It will be wise to prepare your clients to document everything, especially if they are self employed.

NMLS #3116