Why QRM's Are Not the Biggest Challenge

Why QM/QRM Mortgages May Not be the Greatest Obstacle to Homebuying

The talk of the mortgage industry of late has been speculation as to the changes that will come about this January caused by the implementation of new rules in the making of Qualified Mortgages and Qualified Residential Mortgages, commonly referred to and QM and QRM loans. Some of the changes mandated by the new rules will take effect on January 1 (when most of the country will be watching football) while others will take effect on January 10. By the time we come back to work on Monday, January 13, it will be a brave new world… sort of.

At first glance it would appear that new rules regarding QM and QRM mortgages would be overly prohibitive, greatly stifling lenders’ ability to fund the types of loans that had been allowing homeowners to finance their home purchases since the passing of the mortgage meltdown in 2008. New QM/QRM rules prohibit total debt ratios (all consumer debt plus the payment on the new home divided by monthly gross income) in excess of 43%. This would tend to preclude close to 50 percent of loans having funded in 2013 from closing in 2014 and beyond. Another restriction imparted by new QM/QRM rules is that total loan fees cannot exceed 3 percent. When the rules were first published, escrow, title and the lender had to share in the 3 percent limitation. Thank goodness that was amended to include only lender fees, but depending on the type of financing involved, the 3 percent cap could still be overly restrictive.  Also removed from the guidelines was a requirement that all lenders offer a buyer an option of having transaction with absolutely no costs of fees of any kind. Unfortunately, this type of financing is not always available at any given time, so the Consumer Finance Protection Bureau (CFPB), which administers the new rules for QM/QRM lending, removed that requirement.  

As it stands now, however, I do not see new QM/QRM guidelines hanging as a large shadow on mortgage lending moving forward. That is because all the primary agencies that provide for lending in the U.S. have been allowed “carve-outs” for the next seven years to re-define QM/QRM financing in their own likeness. Except for certain basic precepts, their versions of Qualified Mortgages do not have to be in lock-step with the one mandated by the CFPB. The agencies that are being given the seven-year carve outs are FHA, VA, Fannie Mae, Freddie Mac, and Rural Development (USDA). Doesn’t that cover about 98% of the loans that are ever made? In So. Cal and the Inland Empire, the answer is “Yes.”

There are some aspects of QM/QRM loans that must be adhered to, regardless of which agency is ether insuring, guarantying, or buying the loan in question. For instance, all borrowers must demonstrate an ability to repay the loan, known as ATR. ATR guidelines are based on credit worthiness, income, and assets. In other words, it needs to make sense when looking at a borrower’s profile that there would be sufficient cash flow (income) to make the mortgage payments, along with the other necessities of life (i.e., utilities, groceries, clothing, etc.). It must also be determined that this income is likely to continue for at least three more years after the close of a transaction. Credit worthiness applies to an analysis of a borrower’s credit report to show that they have a propensity to be responsible and timely in regards to the re-payment of debt. And of course, a lender wants to see sufficient assets (home sale proceeds, savings, etc.) to cover closing costs and down payment. (Non-payroll-related deposits in checking and saving accounts must be explained and sourced).  ATR was not a trait of the stated-income/asset loans that became extinct about six years ago. From the time of the mortgage meltdown in 2008 up until the advent of CFPB protections, these types of loans had been unavailable in recent years. That was due to the reluctance of Wall Street investors to get burned twice. Now they are more than just unavailable- they are illegal as well.  But in the long run, the seven-year exemptions allowed FHA, VA, Fannie Mae and Freddie Mac loans, along with USDA loans may ultimately make the QM/QRM regulations a paper tiger for the time being. The other walls being put up between prospective homebuyers and homeownership in 2014 are much more daunting in my opinion; especially as they relate to first-time homebuyers.

It was announced this last December 6 that previous FHA single-family loan limits of $500,000.00 in Riverside and San Bernardino Counties were being reduced to $355,350.00. Orange and Los Angeles Counties had their single-family FHA loan limits hacked from $729,750.00 to $625,500.00. Speculation as to new maximum FHA loan limits had been batted around all over the place the last two months. At first it appeared that the jumbo limits for FHA that had been put into place on a temporary basis would be cut to $417,000.00 in San Bernardino/Riverside Counties and $625,500.00 in LA/Orange Counties. The then Federal Housing Finance Agency (FHFA) that oversees FHA along with Fannie Mae and Freddie Mac said it would probably cut FHA and Fannie/Freddie loan limits from $417,000 to $400,000, and down to $600,000.00 from $625,500.00 in high-cost areas, such as LA/Orange Counties- and that would all happen as of January 1. Then the FHFA revised their plan this last October, and said that loan limits would not be cut without at least six months notice, putting the earliest change to loan limits off to at least April, 2014. Mixed into this change-of-heart on the part of the FHFA was the opinion of some regulators and legislators that the agency did not actually have the authority to change loan limits- that only Congress had that authority. So be it, but last Friday FHA ( a separate agency from FHFA) announced the severe cutting of loan limits, as mentioned above, effective for FHA case numbers ordered after January 1.

What this all may mean is that the barrier to homeownership moving forward will not necessarily be that of QM/QRM loan as administered by the CFPB (and the cause of much anticipatory angst for mortgage lenders over the last year or so), but the vacuum created by the severe cutting of FHA loan limits most often used by first time homebuyers. Move-up buyers tend to rely on first-time buyers to buy their homes so they can get on to something bigger and better. We’ll see if the onslaught of changes in the laws designed to “protect” homebuyers in reality protect prospective homebuyers from being actual homebuyers.        
 
 
 
 
 


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