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May 7th, 2013

Fannie, Freddie told to purchase mostly QMs

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Capitol BuildingExotic mortgages that are costly or potentially difficult for borrowers to repay might be taking another step toward extinction.

That’s because the Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac to limit future mortgage purchases to those that:

  • Meet the federal definition of a “qualified mortgage” (QM)
  • Meet a special or temporary QM definition
  • Are exempt from the so-called ability-to-repay rule

Loans Fannie, Freddie Won’t Buy

In effect, the directive means neither Fannie Mae nor Freddie Mac will purchase a loan that’s subject to the ability-to-repay rule if the loan:

  • Isn’t fully amortizing, such as an interest-only loan
  • Has a term that’s longer than 30 years, such as a 40-year mortgage
  • Includes points and fees that exceed 3 percent of the loan amount or other such limits for small-balance loans set forth in the rule

The QM definition and ability-to-repay rule are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The directive will take effect Jan. 10, 2014 and is intended to shrink the entities’ “market footprint,” according to FHFA.

The CFPB has encouraged lenders to originate loans beyond those Fannie and Freddie will purchase. The extent to which they will do so remains to be seen.

Loans Fannie, Freddie Will Buy

Both Fannie and Freddie will continue to purchase other loans that meet their guidelines, including loans processed through their automated underwriting systems and loans that allow the borrower to have a debt-to-income ratio (DTI) that’s higher than 43 percent. The latter aren’t considered to be QMs unless they can be purchased by Fannie and Freddie under the special or temporary QM definition.

The ability to repay rule, finalized earlier this year by Consumer Financial Protection Bureau (CFPB), grants lenders certain liability protections for loans they originate that meet the QM criteria.

The rule generally requires lender to make a reasonable, good faith determination of the borrower’s ability to repay the loan based on the borrower’s income or assets, employment, mortgage payment, debts and credit history.

That might sound simple, but it’s not, and the CFPB has issued multiple documents to explain it. Among them are the final rule, 804 pages, a separate small-lender compliance guide, 45 pages, and a comparison chart that attempts to show both the ability-to-repay and QM requirements.

Most borrowers won’t be affected by these new requirements because exotic loans have all but disappeared from mainstream mortgage lending. Borrowers who are seeking unconventional or riskier types of loans might find their choices more limited than they were some years ago.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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