Here is What Mortgage Lending Will Look Like Going Forward

Industry Observer with No Longer Processing Mortgages. MLO #293441 expired

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.

Original content by Joe Petrowsky NMLS # 6869


“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.


 New regulations to learnThis 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/

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


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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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Comments (8)

Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Thank you for the re-blog. All this means, many challenges for those wanting a mortgage in the future.

Jan 17, 2013 09:11 AM
Steven Cook
No Longer Processing Mortgages. - Tacoma, WA

Joe -- continued challenges, with different twists and documentation.


Jan 18, 2013 03:39 AM
Connie Harvey
Pilkerton Realtors - Brentwood, TN
Realtor - Nashville TN Real Estate

Steven, Joe does a great job walking you through the steps and changes.

Jan 18, 2013 05:51 AM
Steven Cook
No Longer Processing Mortgages. - Tacoma, WA

Connie -- thank you for stopping by and commenting on this re-post.  Hope you have a fantastic weekend!

Jan 18, 2013 05:53 AM
Rebecca Gaujot, Realtor®
Lewisburg, WV
Lewisburg WV, the go to agent for all real estate

Steven, so many changes, I;ll leave it to my mortgage lender or explain to my clients...

Jan 20, 2013 05:40 AM
Steven Cook
No Longer Processing Mortgages. - Tacoma, WA

Rebecca -- and what we have shared so far is just the initial information.  You are wise to leave it to your well informed local lender to take care of explaining how any of these changes affect your clients.

Jan 21, 2013 03:58 AM
Laura Giannotta
Keller Williams Realty - Atlantic Shore - Little Egg Harbor, NJ
Your Realtor Down the Shore!

Steven, good info but I'll bet before these mortgage regulations go into effect there will be more changes!

Jan 21, 2013 10:59 PM
Steven Cook
No Longer Processing Mortgages. - Tacoma, WA

Laura -- These regulations are the "final proposal" -- not that some other things won't get changed in the meantime (after all, why should we ever get to point where they stop changing the rules?)

Jan 22, 2013 03:54 AM