Joe Petrosky, in Connecticutt, has provided a good post summarizing the new rules on "Qualified Mortgages" and what some of the impacts may be going forward, as we look at full implementation next January.
“Here is What Mortgage Lending Will Look Like Going Forward”
Here is what we know so far, even though the new regulations and guidelines won’t go into effect until January 10th, 2014, many lenders will start putting many of these guideline in place long before that date.
This information comes from one of our many lenders:
* The rule will take effect on January 10th, 2014. However, many lenders will begin implementation of parts of the rule prior to then. Watch for announcements from your lender regarding upcoming changes.
* In 2008 the Federal Reserve Board adopted a rule under the Truth In Lending Act began to require lenders to determine a borrower’s ability to repay, the previous requirement is still in effect and has been since October of 2009. The CFPB's new rule is further defined and also enforced by the CFPB under TILA. Violation of rules under TILA are subject to monetary fines and sanctions up to and including loss of license.
* The CFPB created and released the rule in accordance with requirements set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
* Under the new rule congress and the CFPB have created a category of mortgages called "qualified mortgages". They did this to establish a presumption of compliance for all loans in this category if a borrower’s ability to repay was met. This should open up more lending by eliminating frivolous law suits and giving lenders some security when using prudent underwriting standards.
* Creditors must consider the following 8 Factors at a minimum when underwriting:
1. Current or reasonably expected income or assets
2. Current employment status
3. The monthly payment on the covered transaction
4. The monthly payment on any simultaneous loan
5. The monthly payment for mortgage related obligations
6. Current debt obligations, alimony, and child support
7. The monthly debt to income ratio or residual income
8. Credit History
Please note that lenders, agencies, etc. may consider additional factors when determining their underwriting criteria.
* The final rule provides Safe Harbor for loans that satisfy the definition of a "qualified mortgage" as long as those loans aren't considered high cost.
* The rule generally prohibits loans with negative amortization, interest-only payments, balloon payments, or terms in excess of 30 years.
* No-doc loans are also prohibited under the rule.
* The rule states that a loan cannot be classified as a "Qualified Mortgage" if the points and fees paid by the consumer exceed (3) three percent of the total loan amount. Bona fide discount points are excluded from this calculation. “all items considered to be a finance charge under § 226.4(a) and 226.4(b), except—
· Interest or the time-price differential; and
· Any premium or charge for any guarantee or insurance protecting the creditor against the consumer's default or other credit loss to the extent that the premium or charge is assessed
* An appraisal fee would not be considered a finance charge unless the appraisal was completed by an employee of the creditor, this leads us to believe that if you have an affiliated business agreement, fee's collected under that agreement would be included in the 3% rule.
* The rule provides guidance on the calculation of points and fees and thresholds for smaller loans.
* The rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the back end ratio be 43% or less.
* The rule excludes loans made to Fannie Mae, Freddie Mac, FHA, VA, and USDA from the 43% DTI requirement for a period of up to 7 years or until such time as the agency adds their own ability to repay requirement to their underwriting guidelines, which ever comes sooner. I would expect that the agencies and HUD will determine and change their guidelines for ability to repay within the next 12 months.
* The Mortgage Bankers Association, the National Mortgage Bankers Association, and the National Association of Mortgage Brokers are all working with the CFPB to insure that the 3% cap on points and fee's do not increase fee's and tighten credit availability for borrowers. Loans with the same interest rate, terms, and out of pocket costs should be treated the same under the rule regardless of the organizational structure or business model of the originator.
* The Mortgage Bankers Association is also looking carefully at whether the interest rate threshold for safe harbor, which is set at 150 basis points above the benchmark rate, will adversely impact too many borrowers.
* The securitization of Qualified Mortgages exempts issuers from risk retention and premium capture requirements. Once the definitions are resolved, we should see the private-label residential mortgage backed security market begin to be restarted.
* Deutsche Bank recently posted an observation that the Qualified Mortgage definitions will be the primary driver in the future of the private MBS market.
* A strong investor appetite for yield along with the resolution of the Dodd-Frank rules should lure more institutions back into the lending marketplace.
image courtesy of nuttakit/freedigitalhotos.net
Joe Petrowsky, NMLS #6869
Right Trac Financial Group, Inc. NMLS #2709
110 Main St.
Manchester, Ct. 06042
Office: 860 647-7701 x116
Fax: 860 647-8940
Cell: 860 836-9294
Joe Petrowsky does not guarantee nor is in any way responsible for the accuracy of the information provided herein, and provides said information without warranties of any kind, either expressed or implied.
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