The Dodd-Frank Consumer Protection Act, signed into law in July 2010, forever changed the face of the housing market.
Although, in part, designed to restore consumer confidence in the housing industry, the law created strict regulatory mandates — the impact of which are being felt by both mortgage lenders and mortgage seekers, thereby redefining the core of mortgage lending.
The law establishes requirements, referred to as the Qualified Mortgage and Qualified Residential Mortgage that must be met before a mortgage, new or refinanced, can be created. These new requirements, although designed to protect and treat all homebuyers equally and protect the industry from risky lending practices of the past, may actually eliminate lending options for a significant amount of otherwise qualified homebuyers.
More than 48% of the loans issued prior to March 2013 would no longer meet the new requirements, locking out or making it substantially harder for a subgroup of potential homebuyers who now qualify.
The QM includes the Ability-To-Repay rule released by the Consumer Financial Protection Bureau. QM requires lenders to make a credit decision on a borrower based on a reasonable good faith determination of the borrower’s ability to repay the loan. This determination must be based on documented and verified income and limits the borrower’s debt load to 43%. In addition, QM establishes a cap on certain fees related to the transaction, limits the loan term to 30 years and excludes certain types of non-traditional loans.
QRM applies a risk retention rule, which holds specific risk reserve requirements for loans that do not meet specific criteria including limits on rate adjustments, down payments and borrower-debt loads.
Those expected to feel the impact of these rules the most are first-time, lower-income buyers; those with credit scores below 720, the self-employed and anyone wanting a reduced initial down payment.
One of the largest changes coming out of QM is the limit on certain fees in the transaction and how that will limit lending to lower loan amounts. A significant change with QRM is that many new homebuyers will be forced to provide a 20 percent down payment, something most in these identified subgroups could potentially struggle with securing.
With a larger number of college graduates, self-employed and an increased number of immigrants, the cost limit on lower loan amounts and new 20% down payment requirements will change the face of the average homebuyer, making the American dream of owning a home harder to obtain for many.
At this point, the QM final rule and the proposed QRM rule differ is key areas of maximum rate adjustments for Adjustable Rate Mortgages, down payment requirements and maximum debt load. Inconsistencies between QM and QRM are likely to create confusion for consumers and lenders, causing gridlock in lender credit decisions due to the perceived risk of non-compliance to one or both of the rules.
The effective date for QM is January 10, 2014, but there is no official timetable designated for the QRM rule.
However, regulators have said it would be issued “soon.” So many in the mortgage industry are preparing for the new regulations, while coalition and activist groups continue to work toward establishing requirements that will protect consumers while still affording them the possibility of home ownership.
For mortgage lenders and potential homeowners alike, it remains a waiting game.
Marcus McCue is an executive vice president at Guardian Mortgage. The opinions expressed above are his own.
