Last week, the Federal Housing Finance Agency, FHFA, indicated that starting 2014 Fannie Mae and Freddie Mac will limit their mortgage acquisitions to loans that meet the “qualified mortgage” requirements. FHFA wants to reduce lenders' dependency on government guarantees and ensure that we, lending companies like Nations Lending Corporation, only lend to borrowers who can pay back. I believe this may reduce the level of approved loan applications, because with fewer incentives, we may need to tighten underwriting criteria and reduce the number of issued non-qualified mortgages. Many industry leaders forecast these limitations may influence a housing market contraction; I agree.
Fannie and Freddie are banned from purchasing:
interest only or negative amortization loans (loans that are not fully amortizing)
loans with terms that exceed 30 years
loans that include points and fees exceeding 3% of the total loan amount
Furthermore, Fannie and Freddie may not guarantee:
- loans with more than 43% debt to income ratio, unless the loan is eligible for purchase under a special or temporary definition
- However, Fannie and Freddie will continue to purchase loans that:
- meet the underwriting and delivery eligibility requirements stated in their selling guidelines
- loans processed through Fannie’s Desktop Underwriter and Freddie’s Loan Prospector
- loans with a debt to income ratio of greater than 43%
- loans that meet the special or temporary definition of qualified mortgage
- loans that are exempt from the “ability to repay” requirements under the Dodd Frank Act
So what exactly is a “qualified mortgage” you may ask. A qualified mortgage is a loan that was issued based on the borrower’s “ability to pay” indicators. The indicators are:
- 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
- and last, but not least, credit history
The good news is that Fannie will continue to purchase Refi Plus and DU Refi Plus loans and loans sold under their selling guides varieties. The CFPB is yet to issue a final rule regarding loans approved under these programs, and much will depend on FHFA and Fannie’s monitoring of the market’s reaction.
In conclusion, if these limitations come into effect we will have to tighten our underwriting criteria. After the lending financial crisis much of our business derives from government guaranteed loans. But like everything else, market forces lead the way. At Nations Lending, we train our underwriting department to use common sense and work with LOs to make optimal decisions. It is difficult to maintain a sustainable balance between managing risk, enabling branch partners, and serving the public, but we have processes and methodologies that help us gauge the various market, regulatory, and operational forces.
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