WASHINGTON – Jan. 10, 2012 – The real estate industry has waited warily for the government to release its rules that would dictate mortgage terms. One was released this morning, the QM (qualified mortgage) rule from the Consumer Financial Protection Bureau.

While waiting for the federal government to issue the new lending rules, the real estate industry worried the bar would be set too high and disqualify potential homebuyers from a home of their own. A key concern, for example, was that first-time buyers might be required to come up with a 20 percent downpayment.

While the second mortgage rule has not yet been announced – the QRM (qualified residential mortgage) overseen by the Federal Reserve – the just-announced QM strikes a fairly reasonable balance between consumer protections and consumer access to mortgage loans, according to some industry insiders. It does not directly mention a mandatory downpayment, though the unreleased QRM may. Instead, the QM establishes standards a lender must use to minimize the chances that a borrower will eventually default.

Banks are not required to follow either the QM or QRM rules; however, they probably will. By following the QM codes announced today, lenders get a measure of protection from consumer lawsuits. By following the QRM codes not yet announced, they’ll be able to sell their loans to Fannie Mae and Freddie Mac, which frees them to lend more money.

“Our initial review of the QM rule indicates that this balanced approach can be achieved,” says National Association of Home Builders Chairman Barry Rutenberg, a builder in Gainesville, Fla. “NAHB is encouraged that regulators heeded concerns from the housing industry to craft a broad standard.”

Ability to repay

A key to the new QM rule is “ability to repay.” Under the new rule, lenders must determine the borrower’s ability to pay back both the principal and the interest over the long-term − not just during an introductory period when the rate may be lower.

• Lenders can no longer offer no-doc, low-doc loans, otherwise known as “Alt-A” loans, where some lenders made quick sales by not requiring documentation, then offloaded these risky mortgages by selling them to investors.

• Financial information has to be supplied and verified. At a minimum, a lender must consider eight underwriting standards:
— Current income or assets
— Current employment status
— Credit history
— The monthly payment for the mortgage
— The monthly payments on any other loans associated with the property
— The monthly payment for other mortgage related obligations (such as property taxes);
— Other debt obligations
— The monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage. (total monthly debt divided by total monthly gross income).

• A borrower has to have sufficient assets or income to pay back the mortgage: Lenders must make the determination the borrower can repay the loan by looking at the borrower’s income and any assets they have on hand.

• Teaser rates can no longer mask the true cost of a mortgage. Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term.

• For consumers trying to refinance a risky loan, exemptions apply: Creditors refinancing a borrower from a risky mortgage – such as an adjustable-rate mortgage, an interest-only loan or a negative-amortization loan – to a more stable, standard loan can do so without undertaking the full underwriting process required by the new rules.

Qualified mortgages

It will be presumed that lenders complied with the Ability-to-Repay rule if they issue Qualified Mortgages, which must meet the following requirements:

• No excess upfront points and fees: QM limits points and fees, including those used to compensate loan originators, such as loan officers and brokers.

• No toxic loan features such as:
— No interest-only loans
— No loans where the principal amount increases, such as a negative-amortization loan
— No loans for a term longer than 30 years

• A cap on how much income can go toward debt: QMs generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent.

• No loans with a balloon payment, except those made by smaller creditors in rural or underserved areas.

For more information on the new QM requirements, visit the Consumer Financial Protection Bureau website. Links include FAQs, background and more.

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