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Is “QM” Just Another Government Acronym for Business As Usual?

filed under: For Buyers posted on January 21st, 2013

A government created agency known at “Consumer Federal Protection Bureau” (aptly shortened to CFPB) finalized the “Ability-to-Repay” rule which requires lenders to obtain and verify information detailing the consumer’s ability to afford and repay the mortgage.

Cosumer Federal Protection Bureau Goals

And like any program focused on helping consumers- and in this case-home buyers in greater Cincinnati, it will impact both borrowers and lenders.

In an attempt to fix past problems the  CFPB says the new rules focus on three main areas:

  1. Borrowers must provide financial information, and lenders must verify it
  2. A consumer must have sufficient income and assets repay the loan
  3. This ability to repay both principal and interest must be considered over the entire term of the loan, not simply during an introductory period when the rate may be lower

This rule is a large part of what will make up the definition of a “QM”  after the Dodd-Frank reform was passed into law in 2010 and the rules do not go into effect until January of 2014.

What is a Qualified Mortgage?

The lender has to ensure a borrower’s ability to repay their mortgage is a large part of what makes up the definition. When applying for a loan, consumers will be judged on at least eight underwriting factors which will determine their ability:

  1. Current or reasonably expected income or assets
  2. Current employment status
  3. The monthly payment on the covered transaction
  4. The monthly payment on any other simultaneous loans
  5. The monthly payment for mortgage-related obligations
  6. Current debt obligations, alimony, and child support
  7. The monthly debt-to-income ratio or residual income
  8. Credit history

Additionally, the QM definition essentially wipes out the way some loans were made during the boom years that had:

  1. No documentation
  2. Negative amortization
  3. Interest-only payments
  4. Balloon payments
  5. Terms longer than 30 years

The maximum a borrower can pay for points and fees cannot 3 percent of the loan amount. And the debt-to-income threshold cannot be greater than 43 percent an increase of 2% over today’s threshold of 41%.

This recent rule was enacted to make sure the damage and abuses stemming  from the 1993 “Community Reinvestment Act”  (CRA) and the subsequent Gramm Bliley Act (“GLA“) of 1999 don’t happen again.  In short, hopefully the current acronym of “QM” from the “CFPB” enforces the strict underwriting standards imposed upon borrowers and lenders and will stop old practices of older acronym programs “CRA”  lending mortgage money to anybody with no thought given to long term consequences of having to repay the loan.  The good news for borrowers is the knowledge that should be able to repay their mortgage loan.  The flip side of helping the consumer is the return to borrowers having to meet higher standards to secure a loan and according to an article by Jay Weiser some unintended consequences to the housing market.

Maybe the bottom line for consumers is to prepare for the next wave of regulations/incentives/taxes by taking a few moments to study all the government acronyms!

 

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