These new proposed rules are more than just guidelines, they have liability consequences for the lenders under the new Dodd-Frank. Qualified Mortgages are much more than just redefined Fannie Mae and Freddie Mac loans. If fact, I thought Qualified Mortgages were only going pertain to GSE loans. Qualified mortgages guidelines encompass loan products such as prime, sub-prime, government sponsored, private, jumbo and even seller financed second liens. Appraisals have been targeted too with special conditions for flipping. There have also been new rules defining compensation and fees, but these are not the confusing rules. However, lenders are hiring compliance experts to help interpret and conform to these new Qualified Mortgage rules.
What makes these rules so difficult to understand is that apply to so many different classes of mortgages. Also these rules impact lender responsibility/liability if they originate non-qualified mortgage. Some mortgages will have Safe Harbor protection and some will have less protected status. In addition Dodd-Frank rules will require the banks to retain (risk retention) 5% of all non-qualified mortgages, if fact these rules might even eliminate the secondary market for these types of loans.
To make it simple, I’m going try and put these complex rules in a very small table. The problem is that some mortgages can be in two categories. For example, private loans and private jumbo loans. A jumbo loan is a private loan above the GSE conforming limit, but a private loan can be within the GSE mortgage limits. When identifying the mortgage product I’ll try to be very specific to each type of loan.
|Fannie or Freddie Loan||Yes, automatically||Lowest|
|Private conforming (probably very few if any)||Yes||Lowest|
|Jumbo||Yes, if they want sell them on the secondary market||Medium|
|Sub-prime||Yes, but all must be met||Medium|
|Non-Qualified||No, subject to 5% rule and probably no secondary market||High|
|Seller Financed second liens||Yes/No if you originate more than 3 per year||Medium?|
These are the rules in a very small and unsophisticated nut shell. The Fannie and Freddie loans will be further defined under a new set of guidelines called Qualified Residential Mortgages or QRM (aren’t they all residential mortgages?). When the QRM regulation is released in a few weeks it should have the down payment requirement. Anything requirement less than 20% means that it’s a soft rule and the tax payers could bailout the banks again in a future downturn.
Remember these regulations are not just about Debt to Income ratios or down payment requirements it’s the liability to the lender after the loan has been originated. The riskier the loan the higher the mortgage rates, however qualified mortgage rules still need to be followed. The result is that the borrower can’t get a GSE loan, they might have to get a qualified private mortgage but the amount they can borrow can with be reduced if lender wants to maintain the qualified status. Even though these loans will be private they still have to be full documented loans. Remember private mortgages won’t have the government guarantee, but they have meet the qualified mortgage standards.
In fact, some industry experts predict that due the borrowers legal ability to sue the lender under Dodd-Frank that no bank will originate non-qualified mortgages. In fact, some experts are predicting that banks will only originate GSE loans since they will have lowest liability. We will find out on January 10, 2014 when these rules are affective.