The Consumer Financial Protection Bureau released its long-awaited requirements for assessing a borrower's ability to repay a mortgage loan, which included the definitions of 'safe' loans or "qualified mortgages" (QM). Since Dodd-Frank, the pending definitions have caused tremendous uncertainty in the mortgage lending business, causing lenders to tighten their lending standards while waiting for the final rule.
The QM rules, which will go into effect January 2014, represent a reasonable and responsible move by the CFPB to reduce risky lending. The rules are intended to further stabilize the lending environment and foster a more expedient housing recovery.
Let me break out some of the CFPB's key requirements for a General Qualified Mortgage:
• Points and fees paid by the consumer may not exceed 3% of the total loan amount. This limit could be difficult to meet for smaller lenders, who depend on affiliated providers. The CSFB has extended the comment period on fees and points and will be gathering additional industry facts and statistics.
• The loan does not allow for negative amortization, interest-only payments, balloon payments, or a term longer than 30 years. This seems reasonable and actually something that most borrowers and lenders already practice.
• The borrower has a total or "back-end" debt-to-income (DTI) ratio that is less than or equal to 43%. This also seems reasonable. The current rule of thumb for most lenders is that a borrower's DTI should not exceed 36%, except in extenuating circumstances where the risk can be offset by other factors.
• The lender must use documentation to verify income and assets. This seems straightforward to me, lenders should verify income and assets to be able to evaluate the borrower's ability to afford mortgage payments.
• During underwriting, the monthly payments are calculated based upon the highest payment made in first five years of loan. When borrowers choose adjustable-rate mortgages, this rule allows lenders to determine if the borrower will be able to pay the maximum mortgage payment possible during the loan term.
How will the CSFB's QM rule tighten lending practices? Or, How will this impact your ability to get a good deal on a mortgage?
My opinion is that these rules will guarantee safer mortgage loans and will minimize the potential for the abusive lending practices that we witnessed several years back, but they will not significantly restrict credit availability. Consumers who have 'good' to 'excellent' credit and who meet the income requirements set forth, will likely experience improved credit availability over the next few years with these standards in place. Borrowers seeking "jumbo" mortgages which are too large for government backing and/or those borrowers with non-prime credit, however, may experience tightened standards as these loans probably will not be able to go through the automated underwriting system.
Lenders will need to abide by the requirements of the QM rule in order to protect them against possible lawsuits. Many of the lending practices that are not QM compliant, such as, high debt-to-income ratios, terms that exceed 30 years, interest only payments, and negative amortization were detrimental to consumers and the industry. Many borrowers took on risky loans that they either did not fully understand or could not afford, which cost them and American taxpayers dearly.
With all that said, there remains other pending regulations like Qualified Residential Mortgage (QRM), mortgage servicing regulations and GSE reform that could adversely impact the availability of credit and will determine the future landscape of the mortgage securitization market and the US housing recovery.
Current proposals for the pending QRM/risk retention rules include a 20 percent down payment requirement, five percent risk retention, strict loan-to-value limitations and additional debt-to-income boundaries. Hopefully, regulators will bring forth a revised QRM definition that provides qualified borrowers with safe mortgage credit and convinces private mortgage investors to reengage.
Until then, the housing starts are on the upswing, employment rates are beginning to increase and all signs show a housing industry recovery is just around the bend of what has been a very difficult road to travel. Depending on what regulations are coming down the pipeline, I have a fairly optimistic outlook on the US housing market.
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