CFPB Releases Final Qualified Mortgage Rules.    



01/10/2013 - Final Qualified Mortgage (QM) Rules Released.

The Consumer Finance Protection Bureau, or CFPB, released new rules for mortgages that will make it harder for some borrowers to qualify, but, will prevent risky lending that caused the housing meltdown.

These new rules will limit up-front fees, and also set standards for how much income a consumer must make to qualify.  These new rules will go into effect on January 10, 2014. 
These rules spring from the Dodd-Frank Act that includes provisions that require creditors to determine whether the consumer has the ability to repay their mortgage. Under the Act, a creditor can assume that the borrower has met the ability-to-repay requirement if the loan is deemed a QM. The QM definition is important for two reasons: 1) lenders are unlikely to originate mortgages that do not qualify as a QM; and 2) the Qualified Residential Mortgage (QRM) definition can be no broader than QM.
Under the final rule, creditors must generally consider the following factors in determining ability-to-repay (though the rule does provide specific underwriting criteria): 1) current income or assets; 2) current employment status; 3) credit history; 4) monthly mortgage payment; 5) monthly payments on any other loans associated with the property; 6) the monthly payment for other related obligations (i.e. property taxes); 7) other debt obligations; and 8) monthly debt-to-income ratio the borrower would be taking on with the mortgage.
Generally, QM requirements prohibit loans with negative amortization, IO loans, balloon payments, loans with terms greater than 30 years, and loans in which the points and fees are greater than 3% of the loan amount.  The general QM rule requires the consumer to have a debt-to-income (DTI) ratio less than 43%, in line with FHA standards. 

The CFPB provides two different ways for lenders to meet the new ability-to-repay standards. Under the first, borrowers' total debt payments can't exceed 43% of their pretax income. Under the second, loans must receive an approval after being run through the automated underwriting engines maintained by Fannie Mae, Freddie Mac or the Federal Housing Administration, even if those institutions don't ultimately buy or guarantee the mortgages.
Roughly three-quarters of all loans in 2011 had a 43% debt-to-income ratio and met most of the other characteristics of the definition, according to data estimates developed by the CFPB. An additional 20% of loans that were above a 43% debt ratio met the second test.

That second test will be temporary, ending either when Fannie and Freddie's government conservatorship ends or after seven years, whichever comes first. The CFPB said the expanded definition was necessary given the "fragile state of the mortgage market."

The reason banks will want to only offer QM loans is that they are then protected from many homeowner lawsuits. This 'safe harbor' rule is very attractive to most lenders.
What does it mean for you?

These rules will make it harder for lower income folks to qualify, and generally the mortgage process will remain strict with all aspects of the application being verified. 

However, the rules will build in some exceptions to the cap for the next seven years so the real estate market nationwide has a chance to heal. During that period, people with higher incomes and top credit ratings could get qualified mortgages even if the loan brings total debt above 43 percent of monthly income.

More Information

The rule and proposed amendments are here.

A factsheet further explaining the new rule is here.

A summary of the final Ability-to-Repay rule is here.

Learn More -
Fannie Mae and Freddie Mac
Federal Housing Administration (FHA)

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