Ever since the Consumer Financial Protection Bureau (CFPB) released it's "Final Rule on the Ability To Repay and Qualified Mortgage Standards" (QM) on the afternoon of January 10, 2013, the media has been abuzz about "the long awaited Qualified Mortgage Rule" and what it means to buyers of real estate. The truth is, it means very little to you as a potential buyer unless you were planning on taking out a loan you can't afford, defaulting on it and then suing your lender for "setting you up to fail". The yet to be released QRM, on the other hand, may well cost you dearly. This is because the QM (Qualified Mortgage) and the QRM (Qualified Residential Mortgage) are distinct, relate to different parts of the Dodd-Frank Act and have different purposes.
The QM (which is what was released last week) is really for lenders and is meant to provide them with a presumption of compliance with the requirement that a lender adequately assess a consumer's ability to repay a loan offered to them. A lender who follows the relatively simple outline provided in the QM is ostensibly offered safe harbor from consumer lawsuits alleging that the lender did not comply with the requirement that they make a reasonable, good faith determination of that consumer's ability to repay.
In true bureaucratic fashion it took the CFPB well over a year and 804 pages to say, "hey, we think you ought to go back to underwriting loans the way they used to in the old days." This means that a lender who wants safe harbor actually has to verify (using reasonably reliable third party records) the borrower's employment, income, assets, debt and credit history. The lender also has to look at the borrower's debt to income ratio and the current suggestion is that it cannot exceed 43% on the back end. The back end ratio is the ratio that indicates what portion of a person’s gross monthly income goes toward paying their total monthly debt. Total monthly debt includes the mortgage payment (made up of principal, interest, taxes and insurance and condo fees, if applicable), credit-card payments, car payments, child support and other loan payments. Also, according to the Final Rule, no "exotic" loan programs will be considered to be "qualified". In other words negative amortization, balloon payments, interest only loans are all no-no's.
As you can see there is no real news for a prospective borrower here since, really, when was the last time you saw any lender offering a No-Doc Loan, a Negative Amortization Loan, a Balloon Note, etc. and anyone who has been trying to obtain a loan knows that the underwriting guidelines were tightened up (to the point of ridiculousness) a long time ago. Contrary to the way it is being reported, the QM has little to do with the borrower and is really about protecting the lender.
The yet to be released QRM, however, is an entirely different kettle of fish and has the potential to significantly raise the cost of getting a loan. The QRM is about risk retention and is, allegedly, meant to incentivize lenders to make more responsible loans because it will require them to have more "skin in the game". The idea is that lenders will be required to retain 5% of the credit risk for any loans that do not meet the definition of a Qualified Residential Mortgage (QRM).
The final definition of a Qualified Residential Mortgage has not yet been released but the CFPB does state in the Final Rule it released last week that six federal agencies (not including the CFPB) are tasked with implementing this requirement. The agencies are The Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), The Federal Deposit Insurance Corp. (FDIC), The Securities and Exchange Commission (SEC), The Federal Housing Finance Agency (FHFA) and The Department of Housing and Urban Development (HUD).
The CFPB goes on to say in their Final Rule (and this is most troubling) that although the definition has not been finalized, nothing has changed since the last joint proposal from these entities which was put forth on April 29, 2011. That proposal has much more stringent underwriting standards than those in the QM including:
- a maximum monthly front end ratio of 28%
- a maximum monthly back end ratio of 36%
AND, HERE'S THE KICKER FOLKS,
- A 20% DOWN PAYMENT!!!!!!!!!
So, if this is the definition of a Qualified Residential Mortgage that is ultimately adopted, does it mean that lenders will not lend to anyone who doesn't have 20% down? No, of course it doesn't mean that. What it means is that the rate will be considerably higher because of the increased "cost" to the lender because of the increased "risk" of originating a loan that doesn't meet the QRM guideline.
Call me a conspiracy theorist but, IMHO, I believe that this is the real reason behind this entire charade. The QRM opens an avenue for lenders to raise rates and the QM protects them from liability.
The QRM definition is expected to be released later this year. For more information, you can read my post "If You Don't Dive Into Home Ownership Now You May Find Yourself Drowning In The High Risk Pool Later" or you can contact me at 603-490-5344.