This post originally appeared on HSH.com.
While we certainly have waited quite a long time for the Consumer Finance Protection Bureau to release the definition of a Qualified Mortgage, the long-awaited terms seemed merely to reiterate present industry practices.
Note: It’s important to remember that such regulations occur to address the issues of the past, whether or not they still exist, and that, for the most part, the riskiest of mortgage products, practices and practitioners have long since been wrung out of the market. If nothing else, we won’t have to deal with a repeat of yesterday’s problems sometime in the future; by then, we’ll probably have brand new ones with which to contend.
Here are three main components of the Qualified Mortgage definition and what they mean to mortgage borrowers:
Ability to Repay
The highlights of the new rule includes an “ability to repay” standard, where borrowers will need to provide and lenders will need to verify documentation that proves a borrower can actually afford to own the home they are buying, including all property-related expenses (required insurances, taxes, maintenance, etc.) in their calculation. There is an eight-part set of standards lenders will be required to use to guide them:
- Current or reasonably expected income or assets
- Current employment status
- The monthly payment on the covered transaction
- The monthly payment on any simultaneous loan
- The monthly payment for mortgage-related obligations
- Current debt obligations, alimony, and child support
- The monthly debt-to-income ratio or residual income
- Credit history
What it means to borrowers: Not all that much. Full documentation of income and assets has been the order of the day in the mortgage market for several years now.
To be considered a Qualified Mortgage, the regulation now calls for maximum debt ratios of 43%.
However, there is a provision in the rule which allows those exceeding the limit to still be considered a Qualified Mortgage if they are eligible to be sold to Fannie Mae or Freddie Mac after passing though an automated underwriting system which approves them.
What it means to borrowers: It’s a fairly reasonable ratio. Traditional mortgage “back-end” debt ratios are 36%. At the height of the leverage madness which was the housing market five or six years ago, we saw those ratios as high as 55% or 60%, so this new standard seems fairly reasonable, especially given the broader inclusion of items into the “ability to repay” definition above.
To meet the definition of a Qualified Mortgage, loans cannot have interest-only or negative-amortization components, balloon payments (except in certain instances) or repayment periods longer than 30 years. “No-doc” loans cannot be qualified mortgages, either.
What it means to borrowers: These can still exist, but rather they would not count as Qualified Mortgages. According to Dodd-Frank, which set all this in motion, loans not considered “qualified” will subject a party who securitizes the loans to “risk retention” rules, generally of about 5% of the loan or security.
What Do These Changes Mean for the Industry?
Whether lenders will be interested in making loans which aren’t “Qualified Mortgages”–and thereby subjecting themselves to the risk retention requirement costs under Dodd-Frank–isn’t known at this point.
The new rules don’t actually take full effect until January 2014, and there will undoubtedly be changes to who offers what and at what terms between now and then.
For now, consumers are unlikely to notice any difference in the mortgage process, in mortgage prices or availability.
For those interested, the 804-page document which implements the final rules can be found at the CFPB’s website.
For the most part, the changes seem reasonable and sensible, and the CFPB seems to have been sensitive to concerns about both consumer protection and ensuring the availability of credit.