Qualified mortgage rule still worries lenders after revisions

Despite federal agencies taking steps to tweak and adopt the qualified mortgage and ability-to-repay rules set to go into effect in January 2014, private industry officials are nervous about the impact they will have.

Fannie Mae and Freddie Mac, the Federal Housing Finance Agency-run mortgage buyers announced in a May 6 agency statement that they will only purchase loans that meet the requirements for a qualified mortgage, or QM, when the rule is implemented.

The pending regulatory changes are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 in response to the housing market crash of 2008.

To meet general QM requirements loans must be fully amortizing, or have a set pay-off timeline; have a term of 30 years or less; and have borrower fees less than 3 percent of the total loan amounts.

Under nearly all circumstances “balloon loans,” or loans that must be paid off or refinanced before the loan term ends, do not meet QM requirements.

“Adoption of these new limitations by Fannie Mae and Freddie Mac is in keeping with FHFA’s goal of gradually contracting their market footprint and protecting borrowers and taxpayers,” the Housing Finance Agency stated May 6.

Denali Alaskan Federal Credit Union Vice President of Home Loans Jim Picard said some of the finer points of the regulations have changed after the Consumer Financial Protection Bureau, or CFPB, the regulatory agency in charge, put them out for public comment in late April.

“What just changed, or was reinterpreted was the elimination of counting certain fees twice in the 3 percent (borrower fee) cap,” Picard said.

“That seems pretty intuitive and pretty obvious, but we’re talking about a federal agency that’s making rules and putting them out for comment and seeing these rules aren’t practical and don’t work.”

While lenders will not be required to issue loans under QM guidelines, loans that meet the requirements are referred to as “safe harbor” loans, which all but insulate lenders from possible predatory lending accusations.

The rules will further constrict an already conservative lending market, Picard said.

Changes could be coming to the ability-to-repay requirements as well. As the future regulation is currently comprised a borrower must prove a debt-to-income ratio of no greater than 43 percent.

The basis of the requirement will still stand.

The CFPB’s proposed revisions awaiting confirmation include removing requirements forcing creditors to determine the probability of a borrower’s continued employment.

Rather, a creditor would just need to examine past and current employment status.

A rule limiting income in-residence, or “roommate” rental income counted towards the 43 percent ratio to roommates “related by blood, marriage, or law” is also up for elimination, according to CFPB amendment documents.

When the QM rules initially go into effect, a loan approved using Fannie Mae or Freddie Mac’s delegated underwriting may exceed the 43 percent debt-to-income cap, Picard said.

However, that exemption is set to expire in 2021 and is an issue he called a “sleeping giant down the road.”

“I don’t think a lot of people are getting concerned about something that will be taken away from us in seven years,” Picard said.

Officials on the real estate side of the housing market have said the QM and debt-ratio rules will be devastating to a slowly rebounding but still fickle housing market.

Picard said the reduced volumes of loans being handled now compared with several years ago will only diminish further with QM.

The announcement that Fannie Mae and Freddie Mac will only accept QM loans adds to the challenge for individuals with good credit looking for loans that fall outside the debt or QM limitations.

“If the demand is out there for QM loans, why would you stick your neck out there and do a non-QM loans that are going to challenge by the regulatory agency and the borrowers if they run into trouble down the road,” Picard said.

He added that all of the private mortgage purchasers Denali Alaskan deals with have indicated they will not service non-QM loans in the near future.

Some credit unions, such as Denali Alaskan, may continue offering portfolio loans, but those will be “few and far between,” he said.

A portfolio loan is one that is kept on the originator’s books and not sold to a mortgage investment firm.

The current low-interest rate climate makes issuing portfolio loans even more difficult, Picard noted.

“We have to do what we can to lessen the impact of (QM) so we can still give loans to people with credit of good quality that may go over the 43 percent ratio,” Picard said.

He estimated that about 10 percent of loans issued industry-wide currently don’t meet QM guidelines — something that will change and affect first-time homebuyers the most, Picard said.

The 10 percent non-QM figure represents about 40 people per year not getting home loans through Denali Alaskan that would have previously, he said.

At larger institutions the number of loan applications turned away could be in the hundreds to thousands a year, he said.

“Ten percent is a big number given the fact that we’re nationally still trying to recover our housing market,” Picard said.

“Another 10 percent is a few more nails in the coffin, so to speak.”

Elwood Brehmer can be reached at [email protected].

Updated: 
12/06/2016 - 12:32pm

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