In the 1930′s when the federal government tried to stimulate the housing industry by creating Fannie Mae to standardize the 15-year and 30-year fixed mortgages thereby making more people eligible for home loans. In addition, Fannie Mae would sell these mortgages on the secondary market making more funds available for borrowing by the bank. This created a unified system of lending and solidified lending practices that nearly untouched for 70 years. Fast forward to the early 2,000′s and now we had dozens of exotic mortgage products, with new ones coming out every six months, so borrowers could afford higher and higher home prices. Proliferation of affordability products was one the prime reasons for the housing bubble.
The Dodd-Frank bill was passed prevent this bubble from happening again and re-create these older lending standards. So congress invented the “Qualified Mortgage” that will serve as the baseline of residential lending. This is a little confusing to me because for years there has been the conventional 15-year and 30-year fixed mortgages for years that were very standardized and are based on income. However, when the Dodd-Frank bill was past, it didn’t include a definition of the a Qualified Mortgage, and competing interests in the housing industry all want to implement their various definition to help their businesses. This is drifting from the original mission to design a qualify mortgage standard to add stability to the housing industry.
Qualified mortgage rule may come in early January
By Kerri Ann Panchuk December 31, 2012 • 12:10pm
Mortgage lenders and servicers are preparing for an “unprecedented” period in January when they will be forced to analyze some of the Consumer Financial Protection Bureau’s final lending, servicing and appraisal rules scheduled for release next month.
The rules do not take effect immediately, but will set in motion a yearlong frenzy as servicers and lenders analyze the guidelines, revamp their tech and regulatory strategies and, in some cases, change their product offerings to stave off litigation risks.
Richard Andreano Jr., a partner at Ballard Spahr, says the most watched of those rules – the qualified mortgage rule that defines guidelines for determining a borrower’s ability-to-repay a mortgage – could come as early as Jan. 9.
The key qualifying item that is being debated is the down payment requirement. Lenders, NAR, and even members of congress want a 10% minimum requirement. While a 20% down payment requirement would make the housing market much more stable. Again it’s competing interests versus providing a stable housing industry. If the lender underwrote the loan with down payment smaller than the minimum requirement it would then be non-qualified loan subject to a 5% capital requirement so the lender retains risk.
The Jan. 9th date emerged as a possible drop-date for the final QM rule since the CFPB scheduled public hearings to collect feedback on Jan. 10 and Jan. 17, according to Andreano. Nothing has been officially confirmed by the CFPB, but the scheduling of those hearings is a suggestion the rules will be released right before the feedback sessions.
The month of January will bring final CFPB rules on ability-to-repay (qualified mortgage), loan originator compensation, servicing practices, appraisals, high-cost mortgages and escrow issues, Andreano said.
But the ability-to-repay rule is getting the most attention with it having the potential to change the product offerings of some lenders, especially smaller players in the market, Andreano told HousingWire. The effects of the rule hinge on how broadly or narrowly a qualified mortgage is defined.
A broad definition of qualified mortgage would allow the lenders to originate more loans AND retain zero risk (liabilities) on their books. In addition, a qualified loan gives the lender Safe Harbor if the borrower defaults on the loan. As long as the lender followed all the underwriting requirements, the potential losses could be transferred to the taxpayer. Currently, Fannie and Freddie and seeking buy backs from lenders that sold them back loans, this Safe Harbor would make this much more difficult to do in the future.
“Overall, I don’t think there has ever been a period of time where an industry has had to implement so many wide-reaching changes,” Andreano said. “The interesting thing is going to be what is the mortgage marketplace going to look like after this in terms of who is still in the marketplace making mortgage loans.”
Andreano added, “Because of the amount of increased complexities, a lot of small banks were rethinking whether they want to be in the mortgage business.” He says after the final rules are released, the effects on small banks will be watched closely.
Andreano believes the rules may be released as “interim final rules,” leaving the CFPB open to make additional changes. And while the rules will be released in January, the CFPB can allow for lengthy implementation periods, Andreano said.
“In talking with some of the supervisory folks over there (CFPB), they were well aware of the fact that it’s going to be typically burdensome on the industry, and they are not going to flip the switch and implement everything.”
Qualified Mortgages or Qualified Residential Mortgages should be based on credit score, debt, and income. Plus, the minimum down payment should be 20%. The key reason because it’s our tax money (the federal guarantee), the riskier loans should be retained by the banks. If fact, it would be better if ONLY Qualified Mortgages have the federal guarantee and all other loans are provided by private lender lending. If fact, the goal should the vast majority of the lending should be in the private market, this would provide incentive not to drift back to affordability products.
14 Responses to “Next week there might be an early definition and parameters of a “Qualified Mortgage””
Sorry, the comment form is closed at this time.
The gov should not be in the business of underwriting loans issued by privately-owned banks. Period
.
If the congress decides to initiate programs that help the poor get a home, then the gov should issue the loan. Then there’s no problem. However, one feels about that policy, is a matter of personal ideology, but the fact remains, the taxpayer is not in line to get gouged by the big banks as he was last time. And THAT is the real danger.
There’s no reason to have a “qualified mortgage” at all because there’s no reason for gov to guarantee the activities of private industry. It’s their duty to do due diligence. The qualified mortgage presumes that the banks do not know how to do their job—do not know “who” to lend money to. This is nonsense. Of course, the banks know how to check who is creditworthy or not. The whole issue is laughable.
The qualified mortage is a transparent scam to generate loans that will not be repaid and to shrug the losses off on the taxpayer. That is the motive.
I expect the CFPB will cave on the issue, which is why elizabeth warren was prevented from serving as chairman. It’s all one big filthy swindle and, once again, the entire plan has been engineered by the cutthroat banks.
“The qualified mortage is a transparent scam to generate loans that will not be repaid and to shrug the losses off on the taxpayer. That is the motive.”
I think you are right. You are going to see a repeat in that happened in the 90′s where Fannie and Freddie were used to score political points and get votes. It will occur 20 to 30 years from now when the “qualified mortgage” is changed again to help more first time home buyers, stated income, and etc that shouldn’t get loans.
If the mortgage industry were allowed to go fully private you wouldn’t see the 30-year mortgage again. Home prices would plunge and every lobbying group in Washington DC won’t allow that happen. You suggestion is anti-ponzi and I still think we are neck deep in a ponzi culture.
More on this issue and Orange County is a high income area.
The Stealth Tax Hike e
January 4, 2013, 6:53 p.m. ET
Anyone still need a reason to abandon “grand bargains” and deals negotiated between this President and GOP Congressional leaders? Here it is: The revival of two dormant provisions of the tax code means the much ballyhooed $450,000 income threshold for the highest tax rate is largely fake.
The two provisions are the infamous PEP and Pease, which aficionados of stealth tax increases will recognize immediately as relics of the 1990 tax increase. Those measures, which limit deductions and exemptions for higher-income taxpayers, expired in 2010. The Obama tax bill revived them this week. It isn’t going to be pretty.
Under the new law, some of the steepest tax increases may fall on upper-middle class earners with incomes just above $250,000. Here’s why:
During the negotiations, the White House won a concession from Republicans to allow phaseouts for personal exemptions and limitations on itemized deductions, starting at an income of $250,000 for individuals and $300,000 for joint filers.
The Senate Finance Committee informs us that in effect the loss of the personal exemptions, currently $3,800 per family member, can mean a 4.4 percentage point rise in the marginal tax rate for a married couple with two kids and incomes above $250,000. A family with four kids in that income range faces about a six percentage point marginal rate hike. The restored limitations on itemized deductions can raise the tax rate by another one percentage point.
High-income Americans with incomes of more than $1 million may lose up to 80% of their itemized deductions for home mortgage payments, health care, state and local taxes—and charities. Cue the local symphony’s development office.
Add it together and families in the 33% tax bracket could see their effective marginal rate paid on each additional dollar earned rise to above 38%.
A store manager married to a dentist with a combined income of, say, $350,000 may pay a higher tax rate under the new law than if the tax code had simply reverted back to the Clinton-era rates that Mr. Obama championed. Those earning more than $450,000 would see their de facto tax rate rise to about 41% under the new law, not 39.6%. Add in the new ObamaCare investment taxes and the tax rate on interest income is close to 45%.
How did this happen? Recall that early in the fiscal-cliff negotiations House Speaker John Boehner offered to cap itemized deductions to raise $800 billion, in lieu of raising tax rates, if the President would agree to spending cuts. The White House rejected that.
Mr. Obama then insisted on reviving PEP and Pease, thereby recapturing much of the income he claimed to be “compromising” away by agreeing to a higher income threshold for the top bracket. But instead of using phaseouts to offset higher rates as Mitt Romney proposed, Mr. Obama insisted on raising tax rates too.
Democrats are advertising the higher $400,000-$450,000 threshold as a victory for affluent taxpayers in blue states. But with PEP and Pease these Democrats are hammering their own constituents via the backdoor.
Taxpayers in blue states claim roughly twice as much in itemized deductions as those in red states. Income tax rates are steeper in California and New York than Texas and Utah. Chuck Schumer just put a tax bull’s-eye on upper-income Manhattanites, and Barbara Boxer whacked Silicon Valley. Some $150 billion, about one-quarter of all the money raised by this tax bill, will come from this stealth tax hike.
Mr. Obama purports this is merely “a return to the Clinton-era tax rates.” But capital-gains rates will be about three to five percentage points higher than in the 1990s, the Medicare tax is higher, and his stealth tax will raise personal rates higher than advertised. Forget the golden Clinton memories. Mr. Obama is pushing the U.S. back to the Carter era.
Oh quit your whining! Its only on income over $250k… If you can’t live a good life on $250k and 4 kids… Then you need to downsize. Simple as that!
And I could say the same for a household making $50k “complaining” about their circumstances. That $50k household should stop financing $25k cars every few years. They need to drive $1k cars, but most don’t. They need to live in much smaller homes. They can do a lot of things that would allow them to stay out of debt and plan for the future.
These are the same arguments you’d make about households making $250k+, just on a different scale.
Believe me I’m not in the income range. But when the top 50% pays 96% of the federal income taxes then something is wrong. I think in America we should all be treated equally. With income taxes that will never happen, now it’s so one sided. But government taking over 50% of every dollar you make above a certain income, then that’s just stealing.
I work multiple jobs to make ends meet and my wife works If the bottom 50% want a better life, then be more motivated. Some of the richest people started poor.
It’s because ALL income over a certain point is 100% luxury. It’s basically a luxury tax. It’s not stealing either… A lot of people in the $100K+ income range gets bonuses.. and they get taxed between 40-50% on that bonus. And yes, it sucks in a sense… But i guarantee you the employer who gave out that bonus knows what your tax rate is and gave you a bonus accordingly. Maybe you got a $10K bonus.. and feel ripped off when you only take home $5K after taxes because you “earned” $150K in regular salary. Your employer would have given you a $20K bonus if he thought you deserved $10K in take home cash.
That’s the thing.. The truly wealthy are just going to write themselves and their employees larger paychecks to offset any tax increases.
The middle class median salary worker doesn’t have the negotiating power with unions going away and pensions going away.
You should be happy you worked hard enough to get into that recession proof 6-7 figure salary range. Where you can actually negotiate your salary to offset higher taxes.
That’s a fair argument. What might be more accurate, is that professionals making $100k+ married to other professionals making $100k+, experience growth in their incomes that outpaces the pain tax increases might otherwise inflict.
e.g. A legal secretary making $35k might see annual increases slightly outpacing inflation at 3%, and that increase is a relatively small dollar amount. An attorney making $150k might see annual increases near 10%, and that’s a pretty large dollar amount compounding every year.
Taxing wage income so heavily at the higher-end discourages work. The Left will deny this – “Who doesn’t want to make a lot of money? So what if half goes to federa/state income/payroll taxes?”
At a certain household income level, you can make decisions about whether or not one spouse will work. I know a lot of attorneys who make a lot of money, but few like the work they’re doing and would rather be doing something else with their days/lives.
e.g. Two attorneys married each making $150k+ for a joint income of $300k+. After their financials reach a certain point over many years, and the babies start coming, the fact that the wife’s income is taxed at 50% is just another HUGE incentive for her to cut-back or leave the workforce and spend more time with the kids. Should our tax code be doing this?
“Who doesn’t want to make a lot of money? So what if half goes to federa/state income/payroll taxes?”
I had someone make that exact statement to me recently. I didn’t have a good answer. If the only way to get ahead is to make more money, then people will still strive to make more money. I agree that high taxes provide a large incentive to find lower paying but more satisfying work, but that’s not all bad either. Making more money in and of itself is not the key to a happy and more balanced life.
The question is, should your tax toll discourage work? Is that how our tax system should work? The Left will tax tobacco to discourage its use and to make money. They want to tax soda for the same reasons. Why when someone suggests they’re discouraging work by taxing it so heavily, do they deny any possibility that this might be the case? It’s not THE deciding factor in my example, but it’s a huge factor.
Fed Stimulus Isn’t Tied to the Calendar: Bullard
By Justin Menza | CNBC – Fri, Jan 4, 2013 2:41 PM EST
Ending the Federal Reserve’s massive stimulus program will depend on improvement in the economy, not a specific date, St. Louis Federal Reserve president James Bullard told CNBC on Friday.
Bullard, known as one of the more hawkish Fed members, was responding to the sharp reaction in financial markets Thursday over the Fed’s statement that some members wanted to end the bond-buying program this year.
Those comments were contained in minutes from the Fed’s December meeting, which were released Thursday afternoon.
“Why are we talking about dates?” Bullard asked in a “Power Lunch” interview. “If the economy performs well in 2013, the committee will be in a position to think about going on pause with its balance sheet policy. If it doesn’t do very well then the balance sheet policy will continue into 2014. That’s the beauty of doing it this way instead of doing it by a fixed date.”
The Fed previously had tied its expectations for policy changes to a target date. But in December, the central bank made the unprecedented move of linking its bond buying program to unemployment, pledging to continue the stimulus until the U.S. jobless rate falls to 6.5 percent.
Bullard expects the employment rate to tick down in 2013, reaching about 7 percent by year-end. That improvement could be enough to allow the Fed to start considering ending its asset purchases, Bullard said.
Minutes from the December meeting indicated several members would like to stop the bond-buying program before 2014.
These members are increasingly concerned about the potential risks of the Fed’s asset purchase on financial markets as the central bank’s balance sheet has expanded to $2.9 trillion in the aftermath of the the financial crisis and recession of 2007-2009.
While not a voting member of the policy committee in 2012, Bullard is a voting member this year.
Resolving the country’s fiscal problems could improve the outlook for the U.S. economy. Calling the debt ceiling “a dangerous thing to fight over,” Bullard said, “If you could get rid of the medium-term and longer-run uncertainty about the U.S. fiscal outlook, I think it would be a tremendous help to the U.S. economy.”
Dodd-Frank is the “Full Employment for Banking Lawyers Act.” And I greatly appreciate it!
And accountants.