The Consumer Financial Protection Bureau (CFPB) just issued final rules related to the Ability to Repay portion of Qualified Mortgage (QM). This will allow for some compensating factors for qualifying for a Freddie or Fannie loan, instead of the 43% Debt to Income (DTI) ratio.
This change from the current QM requirement won’t be for a few months, and we’ll have to see how the various lenders approach the new guidelines, but in a nutshell here are the modifications:
- A new category called Seasoned QMs. This allows lenders that have had loans performing well for 36 months in their portfolios to be able to have the threat them as a QM loan
- Requires lenders to consider a consumer’s DTI ratio or “residual income”, income or assets other than the value of the dwelling, and debts. Provides more flexible options for creditors to verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts for QM loans.
The changes are encouraging lender loan product innovation. This will help borrowers that are good credit risks, but may not meet the present income guidelines… like the self-employed that have aggressive accountants.
Over time we’ll see how lender underwriting guidelines and the algorithms of the artificial intelligence underwriting systems of Freddie and Fannie (DU & LP) incorporate the changes, and how the loans are priced. Also, the secondary money market and how the Mortgage Backed Securities are priced will have to be coordinated.
Some political elements may push back on the perceived “loosening” of the DTI guidelines. This is not going back to the “Liar Loans” of the past. These loans will still have to be scrutinized, and the compensating factors evaluated. Realistically a self-employed individual that has had their business intact for several years has good credit, and a lot of assets to lean on, maybe a better borrower than a W-2 employee that may meet the present DTI criteria but can be laid off, or job replaced by technology.
We do know that a modification to the QM rule has to be in place before the GSE QM Patch expires (presently 7/1/2021) or there will be a disruption in the real estate and mortgage systems. Presently approx. 60% of the Los Angeles Freddie/Fannie mortgages fall outside of the 43% range… between 43%-50%.
Not all lenders are created equal. As a mortgage broker, I have many lending options to shop loans to, which will be advantageous as the new guidelines permeate through the system.
I’m adding the full CFPB release below.
If you are in the Los Angeles area, have any questions or real estate sales or financing needs, feel free in contacting me
Ron Henderson GRI, RECS, CIAS
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
| FOR IMMEDIATE RELEASE: December 10, 2020 MEDIA CONTACT: Office of Communications Tel: (202) 435-7170 CONSUMER FINANCIAL PROTECTION BUREAU ISSUES TWO FINAL RULES TO PROMOTE ACCESS TO RESPONSIBLE, AFFORDABLE MORTGAGE CREDIT WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (Bureau) issued final rules related to qualified mortgage (QM) loans. Lenders are required under the law to determine that consumers have the ability to repay mortgage loans before lenders make those loans. Loans that meet legal standards for QM loans are presumed to be loans for which consumers have such an ability to repay. The Bureau has issued two rules related to QM loans. The first final rule, the General QM Final Rule, replaces the current requirement for General QM loans that the consumer’s debt-to-income ratio (DTI) not exceed 43 percent with a limit based on the loan’s pricing. In the second final rule issued today, the Bureau creates a new category for QMs, Seasoned QMs. Another current category of mortgage loans that has been accorded QM status under the law are loans that meet the standards of the Government Sponsored Enterprises (GSEs). Most mortgage loans are QMs pursuant to this provision, also known as “the Patch.” However, the Patch will expire on the mandatory compliance date of the General QM Final Rule (July 1, 2021), or the date the GSEs exit conservatorship, whichever comes first. The Bureau’s issuance of its two new rules today will support a smooth and orderly transition away from the Patch and maintain access to responsible, affordable mortgage credit upon its expiration. In adopting a price-based approach to replace the specific DTI limit for General QM loans, the Bureau determined that a loan’s price is a strong indicator of a consumer’s ability to repay and is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone. Additionally, conditioning QM status on a specific DTI limit could impair access to responsible, affordable credit. Under the General QM Final Rule, a loan receives a conclusive presumption that the consumer had the ability to repay if the annual percentage rate does not exceed the average prime offer rate for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set. A loan receives a rebuttable presumption that the consumer had the ability to repay if the annual percentage rate exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points. In addition, the General QM Final Rule: Provides higher pricing thresholds for loans with smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions. Retains the General QM loan definition’s existing product-feature and underwriting requirements and limits on points and fees. Requires lenders to consider a consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts and removes appendix Q and provides more flexible options for creditors to verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts for QM loans. “Through this General QM Final Rule, we are working to create an appropriate, more flexible General QM loan definition,” said CFPB Director Kathleen L. Kraninger. “Our final rule’s price-based approach strikes the best balance between assessing consumers’ ability to repay and promoting access to responsible, affordable mortgage credit.” The Bureau also is encouraging innovation in the mortgage origination market through the issuance of the Seasoned QM Final Rule. The rule creates a new category of Seasoned QMs for first-lien, fixed-rate covered transactions that have met certain performance requirements, are held in portfolio by the originating creditor or first purchaser for a 36-month period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements. To be eligible to become a Seasoned QM, a loan must be a first-lien, fixed-rate loan with no balloon payments and must meet certain other product restrictions. As under the General QM Final Rule, the creditor must also consider the consumer’s DTI ratio or residual income, income or assets other than the value of the dwelling, and debts and verify the consumer’s income or assets other than the value of the dwelling and the consumer’s debts. The loan must also “season” by meeting certain performance requirements at the end of the seasoning period. Specifically, the loan can have no more than two delinquencies of 30 or more days and no delinquencies of 60 or more days at the end of the seasoning period. The creditor or first purchaser also generally must hold the loan on portfolio until the end of the seasoning period. “This Seasoned QM Final Rule will ensure access to responsible, affordable credit in the mortgage market through responsible innovation,” said CFPB Director Kraninger. “Allowing lenders the flexibility to respond to changes in the economy while still ensuring a consumer has the ability to repay will help many consumers achieve their dream of owning a home.” The General QM Final Rule and the Seasoned QM Final Rule will take effect 60 days after publication in the Federal Register. The General QM Final Rule will have a mandatory compliance date of July 1, 2021. Between the General QM Final Rule’s effective date and mandatory compliance date, there will be an optional early compliance period during which creditors will be able to use either the current General QM definition or the revised General QM definition. The Seasoned QM Final Rule will apply to covered transactions for which creditors receive an application on or after the effective date. To read the General QM final rule click here: https://www.consumerfinance.gov/rules-policy/final-rules/qualified-mortgage-definition-under-truth-lending-act-regulation-z-general-qm-loan-definition/ To read the Seasoned QM final rule click here: https://www.consumerfinance.gov/rules-policy/final-rules/qualified-mortgage-definition-under-truth-lending-act-regulation-z-seasoned-qm-loan-definition/ ### The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations, by making rules more effective, by consistently enforcing federal consumer financial law, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov. |
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