What is a Quality Mortgage
A quality mortgage is any mortgage that meets the new guidelines for Ability to Repay (ATR) as published by the CFPB. The reason why anyone should care about the rules published by the CFPB is because by meeting the guidelines in their rules, lenders are afforded some degree of legal protection from lawsuits. Predictably we are seeing lenders state that they will only be writing quality mortgages once the rule takes effect on Jan. 10th 2014. In addition to the QM rules there is a special set of rules to qualify for "Safe Harbor" which means that a lender is completely protected from lawsuits on their loans and being forced to buy back any portion of their loans. Again lenders are flocking to the protections of safe harbor as congress hoped would be the case.
What is About to Change
The thought of change has many people panicking, so what changes should you be expecting? In the short term, not much. The main difference with the new rules is that the maximum fess that a buyer can pay are dropping from the current 5% down to 3%, which in certain price ranges can be problematic, but there is a very easy way around the fees, any closing costs paid by the seller are not calculated into the 3%, seller contributions therefore, will be a big part of contracts going forward. If you are a buyer and you want to make sure there are no issues with the 3 % bump up your offer by a couple of thousand dollars and include the raise in the offer as seller contributions. If you are a listing agent, prepare your seller that they may want to price a seller contribution into the listing.
Aside from the 3%, the other changes are as follows there is now a limit on the APR in order to qualify for "Safe Harbor" the APR cannot be more than 1.5% over APOR (Average Prime Offered Rate), the easiest way to make sure this isn't an issue, use seller contributions to pay the fees that are calculated into APR.
There is also likely to be a reduction in total Debt to income ratio to 43% down from 45% on conventional loans. The reason I say likely is because any loan that is eligible for sale to FNMA, FHA, VA or USDA is automatically considered "quality" and "safe harbor" for either the next 7 years or until the Freddie and Fannie are out of conservatorship or until they write their own policy for QM. FHA has already done this, adopting the 3% fee limit and the APR restriction modifying it a bit to include the APOR + 1.15 + MIP. FHA has decided to ignore the guidance on the DTI as they feel it will not allow them to fulfill their mission of helping under-served markets. I am speculating that Fannie and Freddie will both institute the 43% DTI limit, but they have yet to do so.
What's the Bottom Line?
The bottom line is that for all the talk of damage to the market, things are not going to change significantly for those who were underwriting loans for sale to Fannie , Freddie or any of the government agencies,which is just about everyone I know, The place where I could see an impact would be on Jumbo loans not eligible for sale to Fannie or Freddie, but typically Jumbo loans must meet tighter guidelines already than those that are included as part of QM.
If there is any change that needs to be considered, it will be to include seller contributions more readily in the contracts to avoid Fees limit and APR threshold.