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‘Qualified’ Loans, Redefined
The mortgage industry is bracing for the coming of “Q.M.,” the new federal rules defining a “qualified mortgage” — or one underwritten to standards deemed safe for consumers. The implementation of Q.M. poses a compliance headache for lenders, though the average borrower is unlikely to notice any difference when the rules take effect in January. The most immediate differences will be felt by borrowers at the higher and lower ends of the income scale.
As part of the lending reforms imposed by the Dodd-Frank Act, a qualified mortgage is intended to be less likely to wind up in default. Lenders that meet the Q.M. conditions and underwriting standards are promised protection from legal challenges for those loans.
Among the basic criteria: A Q.M. loan must be fully amortizing with a term no longer than 30 years, and the points and fees paid by the borrower cannot exceed 3 percent of the total loan amount.
Lenders must also document the borrower’s ability to repay the loan, and confirm a debt-to-income ratio of no more than 43 percent. (The ratio represents the percentage of a borrower’s monthly gross income used to pay monthly debts.) Loans with a ratio exceeding 43 percent but qualified for purchase by Fannie Mae or Freddie Mac, or for a Federal Housing Administration guarantee, will still fall under the Q.M. umbrella because of a temporary exemption expected to last at least a few years. Higher-risk mortgages like interest-only and “no-doc” loans, which don’t require verification of the borrower’s income and assets, are ineligible.
For now, the Q.M. definition is broad enough that an estimated 95 percent of mortgage loans being made in the current market fit the criteria, according to Richard Cordray, the director of the Consumer Financial Protection Bureau, which is writing the rules. Mr. Cordray cited that figure in remarks late last month to the Mortgage Bankers Association.
“For a borrower going in January to get a loan, I think it’s going to be pretty much status quo,” said Eric Stein, a senior vice president of the Center for Responsible Lending. “The kind of loans that people are getting these days qualify directly for Q.M. status, so there shouldn’t be any impact.”
Still, credit unions, which are known for being more flexible around mortgage lending, are wary of the rule’s effect on their members, said Carrie Hunt, the senior vice president for government affairs and general counsel of the National Association of Federal Credit Unions. The organization has requested that the Consumer Financial Protection Bureau delay implementation of the rules because the cost of compliance is proving so burdensome for smaller institutions.
The rule could affect the availability of so-called jumbo loans, which, because they don’t conform with the Fannie and Freddie loan limits, would not be considered qualified mortgages if the borrower’s debt-to-income ratio exceeded 43 percent.
At the other end of the scale, the cap on points and fees could make it harder for lower-income borrowers, said Cameron Findlay, the chief economist for Discover Home Loans. Those with less-than-perfect credit and higher debt-to-income ratios often wind up in loans with substantial points and fees that could exceed the 3 percent cap, he said. These consumers would have to look to a nonqualified mortgage, which could be more expensive.
“The question is, how much lending activity are we going to see emerge around the Q.M. box?” said Stan Humphries, the chief economist at Zillow.com, a real estate information service. “If you want to exceed 43 percent D.T.I., but you’ve got an 850 credit score and you want to put 30 percent down, someone’s going to make you a mortgage for that.”
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