Title XIV of the Dodd-Frank Act states that a creditor may not make a mortgage loan without first determining that the borrower has a reasonable ability-to-repay the loan, meaning mortgage companies may only originate a “qualified mortgage” (QM). This sounds reasonable enough … let’s make sure that consumers can afford their mortgage (the economy and housing market would not be in the shape it is had exotic loan programs such as stated income, no-doc, pay option ARMs, and sub-prime not been offered to every consumer with a pulse). However, there are some facts about measuring ability-to-repay and QMs, Dodd-Frank, and the Consumer Financial Protection Bureau (CFPB) that every real estate agent, mortgage professional, builder, title company and consumer needs to be aware of because the landscape of mortgage finance is about to be changed again.
First of all, everyone needs to know exactly what a QM really is. The definition being put forth starts out fairly simple before things get complicated. In order to measure an ability-to-repay, a mortgage lender must consider and verify eight points: Income, employment, qualify based on fully-indexed rates, payments on simultaneous loans, mortgage obligations, current debt, residual income and credit history. Again, this is pretty easy to do considering the loans originated today are arguably the safest and best performing loans ever to be made because no lender wants to be in a position to have any more foreclosures or “buy backs.” The parts of Dodd-Frank’s “ability-to-repay” that most are not aware of involved the “three percent cap” on total points and fees and the “safe harbor vs. rebuttable presumption” theories which will determine litigation risk for mortgage originators.
In my honest opinion, the “three percent cap” on total points and fees will create the most havoc to our economy. As currently drafted in Dodd-Frank, the “three percent cap” will include: Affiliated title fees, loan originator (LO) compensation (which is double dipping), and last but certainly not least, amounts of insurance and taxes held in escrow. You read that correctly, escrows can be included in the three percent cap on points and fees … oh, and by the way, QMs apply to ALL types of home loans such a conventional, FHA, VA, etc. While there is no empirical evidence to suggest that mortgages with points and fees over three percent have a higher rate of default if they were to include these three items, the CFPB under their statutory authority from Dodd-Frank are moving forward with this rule which will be finalized in November 2012 (it was recently postponed until after the presidential election). Now, imagine what will happen to mortgage finance if every possible expense under the sun is included (Texas A6 home equity loans already have a three percent cap on points and fees, not including these items and consumers are hard pressed to find any lender willing to make these loans for less than $150,000). Include the compensation I pay my loan officer, the title fees for a company affiliated with a real estate company or builder, and the high property taxes and insurance for any home in Texas, and consumers may find themselves hard pressed to find any lender willing to lend for under $250,000.
The other alternative to establishing high minimum loan amounts creates its own potential set of issues. In order to offset the costs for these items, lenders will be forced to finance these costs into the interest rates for consumers. Basically, the lower the loan amount, the higher the interest rate, which the market already sees some if this today in the form of loan level price adjustments for FNMA/FHLMC loans. In an environment where rates are hovering around four percent, offering 4.5 percent to a consumer may not sound so bad. However, this comes with its own set of consequences. Higher interest rates not only will mean less qualified buyers, but the potential for litigation to lenders because the legal term disparate impact could then be applied considering racial and economic demographics when applied to loan amounts and loan terms offered.
The “safe harbor” vs. “rebuttable presumption” definitions for originating QMs is currently locked in a heated debate between industry and consumer groups. The mortgage industry, including the National Association of Realtors (NAR), are pushing for a “safe harbor,” meaning if a mortgage company originates a QM loan, the originator will be protected from certain liabilities and legal challenges. Consumer groups are pushing for the “rebuttable presumption” because if a lender follows the rules and originates a QM loan, the consumer can still litigate years down the road and use this as a defense of foreclosure. An example would be if a borrower were to lose their job 15 years into a 30-year mortgage, they could challenge a foreclosure proceeding by making the originating creditor prove in court they properly measured the consumer’s ability-to-repay. Under this alternative, lenders will be forced to only lend well within the realm of qualified mortgages, meaning tighter underwriting and fewer homebuyers. Keep in mind, severe financial liabilities exist for ANY lender failing to the meet the “ability-to-repay” definitions of the Dodd-Frank Act.
So, what can you do about it? First and foremost, educate yourself, your colleagues and consumers on these issues. I still get too many “deer in the headlight” looks when I speak for various groups throughout the country because many housing professionals are “too busy” to pay attention to the looming regulations approaching. Second, you need to get involved and support your trade associations. If you are a mortgage professional, you need to be involved and support NAMB—The Association of Mortgage Professionals (NAMB serves both mortgage brokers and mortgage bankers). Last and certainly not least, every person employed in the real estate or housing finance industry needs to call their legislative representatives to comment on “ability-to-repay.” It doesn’t matter if you are the secretary or the chief executive officer, it takes just five minutes to pick up the phone and call your congressman.
Consumers deserve protection from bad actors. Not one person I know disagrees with that. However, the unintended consequences from poorly crafted legislation are going to wind up harming the very people it is meant to protect. Homeownership is still the American Dream, and every consumer deserves the opportunity to participate in that dream without the fear of being forced into a permanent class of renters. I refuse to resign myself to mediocrity and so should you. So get involved today and let’s work together to stop this threat to the American Dream.
Please contact me with any questions, comments or concerns at
[email protected].
John H.P. Hudson became a residential loan officer in 1998 and has spent the past eight years serving mortgage brokers and loan officers as area manager in San Antonio and southern Texas with Premier Nationwide Lending. Hudson also is the 2012 Government Affairs Chair for NAMB—The Association of Mortgage Professionals having volunteered many years president and other offices of the San Antonio Texas Association of Mortgage Professionals, a chapter of the NAMB. He may be reached by phone at (817) 247-4766 or e-mail
[email protected].
