Today is the day the mortgage industry has been buzzing about: the new mortgage rules are now in effect. Designed as a safeguard against predatory lending, the new Qualified Mortage rules are intended to ensure that lenders issue loans only to those who can afford to repay them.
It remains to be seen how many borrowers the new rules will affect. Richard Cordray of the nation's Consumer Finance Protection Bureau predicts that 95% of the mortgages that were offered yesterday, January 9th, will still be offered today, January 10th. Karen Mayfield, senior vice president in Bank of the West's mortgage banking division, said even fewer of her bank's loans would be affected. "We applied the [new] rules and tests to loans we made in the last year at Bank of the West, and less than 2% of the loans we made we would not make in the future," Mayfield told FORBES.
Still, Don Frommeyer, president of the Association of Mortgage Professionals, says the new rules could affect people particularly in the middle class and Midwestern region, where home prices (and thus loan amounts) tend to be lower. The reason: the new rules effectively limit the fee a mortgage broker can charge, which in turn makes loans under a certain cap not profitable for mortgage brokers. “Loans between $110,000 and $160,000 are going to be the ones that are affected," Frommeyer says. "That’s kind of the core of where the problem is.”
But the market is already stepping in where the new rules do restrict lending, with major banks announcing that they'll begin to offer non-QM loans.
The banks will still have to be careful who they lend to. Under the new QM rule, banks are now legally liable when they issue loans to clients unable to make the repayments. Congress ordered the Consumer Finance Protection Bureau, which was created as a part of the Dodd-Frank Act, to craft the new rules after loose lending practices contributed to the 2008 financial crisis. In the wake of the crash, banks have been considering the following eight factors when determining whether to issue a loan:
- Employment status
- Income & assets
- The monthly mortgage payment for the loan
- Any other simultaneous loans for the property; i.e. a home equity loan
- Other monthly obligations including property tax, homeowner’s insurance, HOA dues
- Other obligations: student loan, credit card debt, child support & alimony
- Monthly debt-to-income ratio
- Credit history
Prior to today, banks could use their own judgement when considering these factors. Now, they'll have to be more careful. "It’s no longer documenting that they feel comfortable, it's essentially documenting for a court case," Mayfield says. "A good rule of thumb is for someone to assume they need two years of everything: W-2s, tax returns, paystubs (2 months), and for an asset 2 months of asset statements." The self-employed, people seeking larger-than-usual loans and, ironically, people with outsize assets will be most affected, because these categories of borrowers tend to have larger paper trails.
What is a qualified mortgage? QMs cannot exceed 30 years, do not have a balloon payment (with a few minor exceptions), do not have negative amortization, and the points and fees cannot exceed 3% of the value for loans over $100,000. QMs cannot have interest-only features. And most critically, the debt-to-income ratio on a QM cannot exceed 43%. However, the new rules allow (for now) an exception to the 43% debt-to-income limit for loans that qualify for resale to
Jumbo loans are the exception. By definition, they don't meet the loan standards for Fannie or Freddie to buy. Often, they are offered at higher debt-to-income ratios than 43%. Consumers seeking these kinds of loans will just have to find banks still willing--and there should be many available to high-quality buyers.
