A Pragmatists Guide to Qualified Mortgages (QM)

Los Angeles mortgage, new rulesA Pragmatists Guide to Qualified Mortgages (QM)

On January 10, 2014, new mortgage rules will go into effect that will change the way home loans are originated by just about every institution.  These changes stem from the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010.  Here is what a buyer, seller and borrower need to know:

Conforming Loans

You are a buyer with more than a 5% down payment.  Your loan amount falls somewhere below the conforming loan limit of $417,000, or a corresponding “high-cost area” conforming limit for your County.  You will see little change here.  The government sponsored entities (GSE’s) will, by definition, be making qualified mortgages or “QM” loans.  Your debt ratio does not necessarily need to be below 43% as long as your lender establishes ability to repay, or “ATR.”  Your loan’s fees cannot exceed 3%, and they generally should not, though this could be a problem on smaller loan amounts.  You won’t find any interest-only loans or terms greater than 30 years in this category.

FHA and VA Loans

For the most part, these are treated like conforming and are exempt from a lot of the Dodd-Frank provisions.  If you meet their qualifying criteria, you basically get a pass.  Like with conforming loans, however, fees can be an issue and cause the loan to fail a “higher priced mortgage loan” test.  If you think it’s just the bank soaking the borrower, think again.  On an FHA loan, what causes the loan to fail HPML most often is the mortgage insurance that stays for life of the loan, and this has nothing to do with the lender.

Jumbo Loans

If your loan amount exceeds conforming limits, or you choose a loan program that has non-QM characteristics, you will see the most change.  Ironically, Dodd-Frank’s “too big to fail” goal wants to see private investment support the real estate market, yet lenders who make these loans now stand the most risk.  If their loans have terms greater than 30 years, interest-only features or DTI’s that exceed 43%, they are non-QM.  The lender has no safe harbor or “rebuttable presumption” from a foreclosure defense and stands the most to lose in the face of a consumer complaint.  This higher risk will translate to reduced options and increased cost for borrowers — there is no other way for lenders to make these loans.  Jumbo loans that do not have interest-only features, terms greater than 30 years and debt ratios that exceed 43% must still take the 3% fee test.  Whether they pass or fail determines the level of borrower recourse.  It is expected that our traditional jumbo lenders will aim to stay in this (non-HPML QM), space.

Recap

  • QM:  Fannie, Freddie, FHA, VA, USDA.  No terms greater than 30 years, no interest-only, fees less than 3% but, possibly, debt-to-income in excess of 43%.
  • Non-QM:  Terms greater than 30 years, interest-only loans, DTI’s greater than 43%.
  • HPML QM:  Fees in excess of 3%, but no interest-only, terms greater than 30 years or DTI’s over 43%.
  • Non-HPML QM:  Fees less than 3%, but no interest-only, terms greater than 30 years or DTI’s over 43%.

Summary

It is my opinion that in 2014, Dodd-Frank could take 1 in 5 borrowers out of qualification who were otherwise approved in 2013.  All mortgages will see higher fees and rates which will be related to compliance costs the lender must bear AND recent regulation that will continue to increase the guarantee fees on GSE loans.  Jumbo money must get more expensive because of the additional risk lenders must take in order to make these loans.  Across the board, borrowers will have fewer options, most of them at higher rates.  I’m making no guesses on interest rates themselves — this is all relative to the alternative of not having Dodd-Frank in effect.

I happen to be an optimist but this blog, as stated in the title, was written by a pragmatist…

– See more at: http://activerain.com/blogsview/4274865/a-pragmatists-guide-to-qualified-mortgages-qm-#sthash.PVZ6411p.dpuf

Robert Spinosa

Rob Spinosa is a licensed mortgage professional in California (NMLS: 22343 and CA BRE: 01297944). He works for RPM Mortgage, a prominent, non-depository mortgage bank located in the San Francisco Bay Area. Rob’s been helping buyers and owners realize the dream of responsible home ownership since 1999 and has a “can do, will do” attitude to both business and life. Outside of the office, Rob is a competitive triathlete and has completed the prestigious Hawaii Ironman on multiple occasions. He can be reached at 877-270-5959 or rspinosa@rpm-mtg.com.

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