What the ‘QM’ definition means for youby Tim Manni
The Consumer Financial Protection Bureau released the Ability-to-Repay rule on Thursday which is designed to both ensure that consumers have the financial security to repay their home loan in full and to put an end to what the CFPB describes as “reckless lending.”
The CFPB says the rules focuses on three main areas:
- Borrowers must provide financial information, and lenders must verify it
- A consumer must have sufficient income and assets repay the loan
- This ability to repay both principal and interest must be considered over the entire term of the loan, not simply during an introductory period when the rate may be lower
This rule is a large part of what will make up the definition of a “Qualified Mortgage.” The CFPB was tasked with coming up with a QM definition after the Dodd-Frank reform was passed into law in 2010.
“We had what were called ninja loans, no income, no job, no assets, and yet borrowers still could manage to get loans approved,” said Richard Cordray, director of the CFPB, in an interview with PBS.
“Those were loans that ended up setting up many consumers to fail, and they were at the heart of the reckless lending that helped precipitate the crash in the housing market.”
What is a Qualified Mortgage?
Ensuring a borrower’s ability to repay their mortgage is a large part of what makes up the definition. When applying for a loan, consumers will be judged on at least eight underwriting factors which will determine this ability. This comes directly from the full text of the CFPB’s Ability-to-Repay rule and the Qualified Mortgage Standards (page 3):
- 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
- Credit history
Additionally, the QM definition essentially wipes out loans with:
- No documentation
- Negative amortization
- Interest-only payments
- Balloon payments
- Terms longer than 30 years
Consumer paid points and fees cannot exceed 3 percent of the loan amount. Lastly, the debt-to-income threshold cannot be greater than 43 percent. This represents an increase from the more common limit of 41 percent in today’s marketplace, explains Keith Gumbinger, vice president of HSH.com.
What the QM definition means short term
Given the fact that the “Qualified Mortgage” definition doesn’t take effect until Jan. 10, 2014, consumers shouldn’t feel any serious impact this year, and perhaps not much at all.
“Most of this is already in play at the moment,” says Gumbinger. This definition is designed to fix yesterday’s problems, problems that aren’t necessarily prevalent in the current market, he explains.
Will it restrict lending conditions?
Unfortunately, that’s a question that can’t be answered at the moment. Lenders will spend this year figuring out how this definition will impact their ability to make money of “qualified” loans. What that means comes next January is still unknown.
“The biggest impact will likely be on the smallest banks if the CFPB’s proposals aren’t approved,” says Gumbinger. “These little guys didn’t participate in the excess of yesterday. And if they did, they’ve probably already failed.”
When all is said and done, we don’t think this definition will enhance lending opportunities as Cordray suggests. But we also don’t see any great restriction either.