Spurred by the mortgage crisis of 2008, the fledgling Consumer Financial Protection Bureau (CFPB) drafted new mortgage rules aimed at protecting consumers and preventing another mortgage meltdown. The regulations, which finally took effect last week, define “qualified mortgages” for lenders and provide legal safe harbor for lenders who issue these loans.
Analysts and industry observers have mixed opinions on the new regulations. Some say the new regulations will better protect consumers. Others say it will make homebuying more difficult for the average borrower.
Real Estate Agents need to be aware of these new regulations as they may affect their buyer’s ability to qualify for a mortgage or a particular loan product.
What is a Qualified Mortgage?
A qualified mortgage meets criteria defined by the CFPB, which we’ll spell out in more detail below. By making a qualified mortgage, lenders are entitled to legal protection against claims from distressed borrowers or buyers of mortgage-backed securities.
Lenders want to limit their risk, so they have a strong interest in making qualified mortgages. Companies can still issue mortgages that don’t meet “qualified mortgage” standards but in doing so, they lose liability protection on those loans.
“I would be very, very surprised to see anybody lending outside of the qualified mortgage, because I think the risk would be very high,” Marianne Collins, executive director of the Ohio Mortgage Bankers Association, said in a recent Cleveland Plain Dealer article.
CFPB estimates that 9 in 10 loans already meet QM guidelines. But some lenders may be more willing than others to originate loans outside the new standards. For example, Wells Fargo recently hired 400 underwriters dedicated to making non-QM loans, which the massive bank will retain rather than sell to investors.
What Loans are Affected?
In the push to protect consumers, government regulators sought to eliminate what they saw as risky loan characteristics. Now, in order to be a Qualified Mortgage, a home loan can’t have:
- Interest-only payments
- Negative amortization
- Balloon payments
- A term exceeding 30 years
- Points and fees greater than 3 percent of the loan amount (for loans over $100,000)
The loan must also fall into one of three categories:
- The borrower’s debt-to-income ratio doesn’t exceed 43 percent
- The loan qualifies for purchase or guarantee by the government or a government-sponsored enterprise
- The loan is kept in-house by a small lender
As a result, at least for the time being, loans eligible to be sold to Fannie Mae or Freddie Mac or that are insured by the Department of Housing and Urban Administration (HUD), the Department of Veterans Affairs (VA) and other governmental agencies are presumed to be Qualified Mortgages.
That’s important because some of those loan types, including VA home loans, allow borrowers to purchase with a DTI ratio well above 43 percent.
The DTI cap is a major focus for those in opposition to the new QM regulations. But it’s unclear how many mortgages would actually be affected by that limit.
What are the New Mortgage Rules?
A borrower’s inability to repay the mortgage was one of the major causes of the financial crisis in 2008. Many of those consumers received loans they almost certainly couldn’t afford, or obtain mortgages without having to actually document their income and assets. To address this issue the CFPB created the Ability to Repay rule.
Lenders must consider the following eight factors when determining a prospective borrower’s ability to repay:
- Current or reasonably expected income or assets
- Current employment status
- Monthly payment on the covered transaction
- Monthly payment on any simultaneous loans
- Monthly payment for mortgage-related obligations
- Current debt obligations, alimony and child support
- Monthly DTI ratios
- Credit history
Underwriters have flexibility in assessing these factors, but must thoroughly document that income is adequate to cover all obligations. While not required until now, many lenders have been using some if not all of these factors for several years to determine the credit worthiness of an applicant.
How is the Industry Responding?
Opinions vary as to the likely effectiveness of the new regulat
ions, but many industry analysts believe the CFPB guidelines resemble what’s already happening in the marketplace.
- Subprime loans are already passé: “Do you know of any banks that are still doing these things? This is putting into law what the banks are already doing.” (Economist LeRoy Brooks of John Carroll University)
- Kudos to the CFPB: “We are pleased that the rule encompasses the vast majority of the safe, high-quality lending being done today. Today’s QM rule is a positive step to bringing certainty to the housing finance system.” (National Association of Realtors)
- QM rules will require modification: “The way the CFPB perceives this rule to be is quite different from the way a lot of lenders perceive it. I think the CFPB in very short order will have to revisit these rules and make some changes to protect the consumer.” (Marc Savitt, president of the National Association of Independent Housing Professionals Link: http://www.mpamag.com/mortgage-originator/qm-problems-already-starting-claims-mortgage-pro-16771.aspx)
- The old ways are dead, anyway: “The whole idea of the qualified mortgage was to . . . limit those exotic programs, like interest-only or negative amortization. Those things are dead. The financial crisis really taught the industry that there’s just no room out there for those kinds of products.” (Marianne Collins, executive director and chief operating officer of the Ohio Mortgage Bankers Association)
Will the new regulations change the lending industry? At this point, it’s still too early to tell. Lenders have already tightened standards and pinched cash flow, so it’s likely changes won’t be that drastic.
But the new guidelines do hint that the stricter credit climate is not a blip. Lending practices have changed for the long term, and probably for the better.
Photo courtesy of nikcname