The Qualified Mortgage (QM) rule which is slated to go into effect on January 2014 contains provisions that will radically change the mortgage lending environment for all new loan applicants (existing applications may be grandfathered). According to a recent study by Origination News, an analysis of home loans showed that 1 in 5 current mortgages would not qualify under the new rule. To comply and be able to sell mortgages on the secondary market to Fannie Mae and Freddie Mac, lenders won’t be able to offer interest-only loans, negative-amortizing loans, loans longer than 30 years or balloon loans, or charge the borrower more than 3% of the mortgage amount in fees ("points" are included).
Lenders must also adhere to the Ability-to-Repay rule, which says borrowers' total debt liability -- including housing -- should not exceed 43 percent of income. According to the Consumer Financial Protection Bureau, lenders must "make a reasonable, good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling." Lenders who issue mortgages that meet the QM criteria have safe harbor, meaning they cannot be sued by borrowers claiming the loan terms are unfair.
Much has been written about the upcoming changes, and the true affect to prospective borrowers is only speculative. There is another piece to the puzzle which lies behind the scenes that could cause certain lenders to change their habits for direct and retail lending. That has to do with a requirement that the lender retain 5% of any loans that are "bundled" for resale to the secondary market for any non Qualified Residential Mortgage (QRM). A QRM is a mortgage (presumably a QM) in which 20% or more of the underlying value of the collateral is paid up-front. When a lender is required to retain a percentage of the loans that they underwrite, they have less money to lend and many lending institutions are also subject to capital-at-risk rules which further encumber its assets. Therefore the name of the game is going to be 20% down to buy a home and it must comply with the QM rules - or no loan approval.
Buyer Beware!
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