By Kevin McGoff – NMLS #201212 Sales Manager, Sage Bank
On January 10th of 2014 a new set of rules was established and implemented by the C.F.P.B. (Consumer Finance Protection Bureau) as a result of the Dodd-Frank act. The act empowered the C.F.P.B. to police the mortgage industry, oversee the penalties it doles out and to occasionally review how lenders are making loans across the country.
There will now be “qualified mortgages” or “QM” loans that lenders will make and then there will be “Non-qualified” or “non QM” loans. To the lender, it is actually a big deal as a mortgage deemed “qualified” gives the lender a level of protection against a homeowner lawsuit. If the lender makes a “non-qualified” mortgage (which they are still allowed to do) then they are open to lawsuits from consumers if the consumer feels the lender misled them on the mortgage, or put them in harms’ way by granting the loan. This new layer of “protection” the consumer now receives comes with a price, however.
The first (and most important) part of the new rules is a limitation to the qualifying ratios used by lenders. In a nutshell, for a mortgage to be deemed “qualified”, the maximum housing ratio (including all other debts) allowed will be set at 43% of buyers total gross income. This establishes a maximum “qualified mortgage” ceiling. Many lenders are setting firm standards at these ratios. My current company has set their internal portfolio ratios at this ceiling. Some small lenders are so afraid of the new rules and potential crippling lawsuits, that they have actually stopped mortgage lending entirely.
How does this affect the homebuyer? Here’s an example:
Buyer Income: $5,200
Loan Requested: $300,000 @ 4.5% = $1,520.06
Taxes, Ins. & condo fee $540 + $1,520.06 = $2,066.06 (Front ratio)
Total Housing: $2,066.06 Plus $400 other monthly debts = total debt for ratio of $2,466.06
Qualifying Ratios 40% (front) 47% (back ratio or Total ratio) in 2013 this would be approved, but in 2014 IT MAY NOT BE! Some lenders will allow it, some will not.
This homebuyer now needs to earn $5720 per month to get a “qualified mortgage” and keep total ratio at 43%. This client now qualifies for a loan that is about $200 per month cheaper due to new rule. This could be $20,000-$25,000 less in buying power.
If you couple this new rule with the appreciating home values, an increasing interest rate environment and an inevitable price increase in the delivery fees set by FNMA (already announced but just on hold today) and you can see why some well intentioned and qualified buyers will be squeezed out of home buying.
There will be lenders who make “non-qualified” loans as long as the automated underwriting engines at FNMA and Freddie Mac grant the approval. It remains to be seen how liberal those automated underwriting engines will be. As a consumer, you need to ask your lender if they will approve you even if your qualifying ratios exceed 43%. If they do not (based on the loan program you need) you should shop for a lender that will.
The 2nd impact on this rule is lenders are now increasing fees in order to put people in place in their companies to police these policies. They are hiring more and more compliance people and less and less origination support. The consumer will pay more in processing fees and underwriting fees at most institutions. I have had 3 of my lenders at my company raise their fees to us this past month. We will simply pass it along to the consumer.
There’s a lot more to these rules. I am just touching on the most important part here. Those looking for smaller loans on lower priced homes have other issues to be concerned about. I do not lend in a lower priced home market so I will offer no comment on this subject.
My own opinion is that while the Dodd-Frank rulings are well intentioned, there a MANY loans that have closed with high ratios and that today are performing beautifully for FNMA and Freddie Mac. The knee jerk reaction of the Dodd-Frank act to now police qualifying ratios will hurt the consumers’ ability to purchase certain properties that only 2 months ago they would have been able to. It will cost today’s new homebuyer more to close the loan in fees and ultimately hinder the economic recovery in certain areas. Caveat Emptor!