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.
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.