Bank executives are talking about it, credit union officials are talking about it, loan officers are talking about it, even the president and presidential candidate are talking about it.
It’s the so-called “qualified mortgage (QM).”
Few know exactly how it will pan out, but it does have the potential to derail the nascent real estate recovery by limiting the number of borrowers who’ll qualify for a mortgage.
Authorized by the Dodd–Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (CFPB) plans to finalize rules for the QM in January, 2013.
Until then, uncertainty is sending jitters through the mortgage and real estate industries.
The QM, designed to consider a borrower’s ability to repay a mortgage, is the first-ever attempt to establish standards for a low default-risk home loan. That’s likely to include rules about debt-to-income (DTI) ratios, employment status and other ability-to-pay factors.
Qualifying QMs could also get a legal shield from the CFPB. In a court case, judges would likely rule in lenders’ favor if a QM borrower defaulted, faced foreclosure and challenged the foreclosure in court, provided the lender stuck to underwriting with QM standards.
QM standards would also determine what mortgages would qualify as subprime loans which would come with less legal protection for the lenders. A consumer could argue the lender should have known the consumer couldn’t afford the mortgage.
QM standards under consideration include:
• A 43 percent DTI cap. Current Fannie Mae and Freddie Mac loans allow a 45 percent DTI cap. Federal loans insured by the Federal Housing Administration (FHA) and Veterans Administration (VA) allow even higher DTIs. If the DTI comes in at 43 percent, expect the lenders to underwrite for a lower ratio, say 41 percent, to further reduce their risk by allowing for underwriter error.
• The new subprime loan. Loans at 1.5 percent above the Prime Rate would be labeled subprime mortgages.
How could QM standards affect borrowers?
• Smaller mortgages. If you currently earn $10,000 a month and lenders allow a 45 percent DTI, your current and future housing debt level can be $4,500 a month. If the DTI is capped at 43 percent, that number shrinks to $4,300 a month.
If you earlier qualified for a $400,000 loan, the $200 reduction in allowed debt level will reduce your loan qualification level to $358,000 – a home loan for $42,000 less.
• Less low down payment lending. The FHA loans allow as little as 3.5 percent down and some VA loans ask for zero down. They also allow higher DTI ratios. If the QM rule restricts the DTI to 41 percent or 43 percent, that could reduce the number of first-time home buyers who carry DTIs higher than 43 percent and who have a greater dependence on low and no down payment loans.
Until QM rules are in place, uncertainty remains. The uncertainty is causing risk-adverse lenders to keep current underwriting rules tight.
“The uncertainty on rules and regulations is causing lenders to pull back out of fears of making a mistake,” says David H. Stevens, the president and chief executive of the Mortgage Bankers Association.
“It’s causing lenders to keep standards tight because they don’t know what risk they’re taking until the final rule is complete,” said Stevens.
Editor’s Note: The independent QualifiedResidentialMortgage.org warns, do not confuse a “qualified mortgage(QM)” with a “qualified residential mortgage (QRM).”
“They are not the same thing. They are born from the same piece of legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act. While their names are similar, these are actually two variations of the same set of rules,” writes Brandon Cornett, real estate writer, QualifiedResidentialMortgage.org publisher and founder of the Home Buying Institute.
Learn more from the infographic below. Click to enlarge.