JMAC, and our brokers, have been incorporating QM (“Qualified Mortgage”) rules into our day-to-day routines for several months, but last Friday was “D-Day” for putting those rules in place. The new mortgage rules, created as a result of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, are designed to reduce risky mortgages and avoid another foreclosure crisis. Here’s some information that our brokers can use to answer their borrower’s questions.
As noted, although the rules formally took effect last Friday, they were issued a year ago, and all lenders have already stated to implement the major changes. Plus, the newly risk-averse mortgage industry has already been cutting back to the most basic products. The biggest part of the new rules is the “qualified mortgage,” (QM), a new class of mortgage that has to meet certain requirements. Lenders such as JMAC who make qualified mortgages will be protected from legal liability if the loan goes bad.
Under the Q.M. rules, lenders have to make a good-faith effort to assess whether a borrower has the ability to repay the loan. It limits the overall debt a borrower can carry, and it also limits the points — a mortgage term for pre-paid interest to lower the monthly rate — and fees a lender can charge. Certain types of mortgages seen as too risky or difficult to understand won’t qualify at all. That includes interest-only loans, mortgages with a balloon payment or loans with a term of more than 30 years.
The qualified mortgage rule limits the total debt-to-income ratio buyers can assume to 43 percent, although there are certain exceptions for Agency (Fannie, Freddie, FHA, VA) loans. But it means that people who are already carrying a lot of debt might have to lower their new home borrowing expectations to stay under the limit. The rules may also limit options for borrowers on the low end of the market: points and fees are capped at 3 percent of the loan amount; smaller mortgages might not be very attractive.
That all being said, 2014 will be an interesting year as non-QM lending increases in popularity.
Lenders are free to assume additional legal risk by making non-QM loans. And in fact, it’s likely some lenders will make the calculated decision to focus on the non-QM sector. But we aren’t there yet, and expect JMAC to carefully monitor the lending environment.