QM? What’s a QM? Qualified Mortgage?
A special thanks to our friends at Fairway Mortgage and Greg Ulrich for providing this great update on changes that will be happening this year!
Qualified Mortgage (QM) Standards and
the Ability to repay implementation January 10, 2014
So why the QM rule? It requires creditors to make a
reasonable, good faith determination of a consumer’s ability to repay any
consumer credit transaction secured by a dwelling and establishes certain
protections from liability under this requirement for qualified mortgages. I would have to describe the spirit of the
rule as threefold. To protect consumers from unscrupulous lenders that could
put them into a loan that is not good for them. To protect buyers from
themselves by not over buying. And third
to make sure a consumer is not overcharged.
So the intent is good right?
It was 1993 and a young 23 year old right out of college
entered the mortgage business as a loan officer ready to make the “big bucks”
(making $16k that first year). After working
through his first couple of loans he found himself saying often, “Boy it sure
is hard to get a loan through underwriting.” FHA had debt to income
requirements of 29/41, Conventional was 28/36. The minimum down for
Conventional was 10% and then FNMA announced they would allow 5% down and
underwriters started biting their nails! Fast forward seven years and from 2000
to 2007 things became…well loose. First stated income, then subprime, then no
ratio and then no doc! In 2005 the young Loan Officer was now 35 and moved up
to a producing Sales Manager. He had a meeting with an Account Executive from
Widecountry (we will not use their real name to protect their stellar
reputation). The Account Executive was beaming ear to ear. “Great news!,” she
said. “We can now do a stated income
loan with no down payment and a credit score down to 620.” The Producing Sales
Manager blinked in dismay shaking his head and said, “Wow, this has gone too
far.” A little over a year later the bubble burst.
A recession hit that has been compared to the Great
Depression of the 1920’s. Large investment Banks saturated with toxic mortgage
backed securities either went out of business or merged with other large
investment banks. Rating agencies lobbyists managed to keep the focus on the
evil banks and evil loan officers and avoid scrutiny for being paid BY THOSE
THEY RATED to give AAA ratings (Google it). FNMA was no longer a Government
Sponsored Enterprise, but taken over and now owned by the U.S. Government. As
of today more than 380 mortgage companies and banks have closed. Since then there has been a lot of change and
regulation, but enough history, let’s dive in to what is coming at the start of
next year and how you the Realtor are affected by this.
Here is what you need to know about QM so you can be ready before January 10th.
Why before? Are those folks that are currently pre-approved valid buyers if
they close after January 10th? See below.
·
The maximum debt to income will be set at 43%.
There are exceptions to loan type, but irrelevant to you the Realtor (If you
are interested here is a great link from the CFPB. http://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z/
)
So if a Loan Officer preapproves a buyer incorrectly they will not be
able to switch them to another loan program that allows for a higher debt to
income. Ask the lender if they have
gotten financials from the borrower for an accurate pre-approval. If a buyer
has a “side job” they very well could be writing off expenses that will negatively
affect their qualifying income or even write off unreimbursed expenses.
·
Points and fees are less than or equal to 3% of
the loan amount for loan amounts over $100,000.00. The point/fee threshold will be $3,000
for loans from $60,000 to $99,999 and for loans from $20,000 to $59,999 it is
5% of the amount financed. Keep in mind these amounts are not just lender
charges. Remember, many of the costs are
fixed. A $500 processing fee is 1% of $50,000 loan and .167% of a $300,000.00
loan. Yes, your spidey senses should be tingling as are mine! Phrase for
2014…”Unintended Consequences.” “Sorry Mrs. Buyer, your rate has to be higher
to absorb costs…” Or even worse, “Sorry Mrs. Buyer the rule is in place but
unclear so you cannot qualify for more and since the rule is unclear we cannot
loan you less.”
·
No risky features like negative amortization,
interest only or balloon loans. This has no impact on you as an Agent as there
has been no secondary market for this product in the last 5 years so the
product does not exist anyway. By the
way, those evil, terrible, negative amortization loans still in loan servicing
existence from the early 2000’s currently have an accrual rate of 1.875%. What?
I thought they were terrible loans? It has to be true. I read it on the
internet…
·
Even if a loan is not a QM it can still be an
appropriate loan. Did you know under this rule the borrower can sue a lender if
their loan goes into foreclosure and the borrower feels the lender does not
qualify their ability to repay or follow QM. I can’t think of an institution out
there that would invite this kind of litigation.
In 1993 it was,“Boy it sure is hard to get a loan through
underwriting.” And so it is in 2013. This won’t slow you down. It is just a lot like it used to be. Stay
informed. Keep moving!
Greg Ulrich, MLO
Fairway Independent Mortgage Corporation
NMLS #254799
817-812-2287 Direct
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