Friday, January 25, 2013

Ability to Repay and the Qualified Mortgage

This month the Consumer Financial Protection Bureau issued its ruling on Ability to Repay and established criteria for the Qualified Mortgage. Something the CFPB has been waiting to issue since the inception of the Dodd-Frank Wall Street Refrom Act. The essence of the ruling is that lenders will need to verify a borrower's ability to repay the mortgage. Also, mortgages that meet certain criteria will be Qualified Mortgages resulting in the lender having reduced litigation risk. In recent history, borrowers have sued banks stating that they were given a loan they could never reasonably pay back (yes, I understand how crazy this sounds - but it has happened to the tune of millions). These law suits prompted the banking lobbyists to ask for a "safe harbor", enter the QM and Ability to Repay.

The second class of loans created by this ruling are high cost mortgages - 1.5% above the prime offered rate. Loans with interest rates above 1.5% over the prime offered rate (and meeting the QM criteria) are offered a lesser degree of legal protection (called rebuttable presumption).

What all this means to you:

1. Mortgage loans will require more documentation Two years tax returns will be required for self-employed. In the past, there were instances where only one year would be required.
2. Mortgage loans that fit the QM criteria may become less expensive and more available. The reduced litigation risk will provide incentive for banks to lend more in this market.
3. Alternative products will become more expensive. The 1.5% cap above the prime offered rate will be in play as the interest rate environment changes. 1.5% above the standard conforming offered rate is not much and many Jumbo and alternative products use an increased rate to offset the risks associated with these loans.

Personally, my business plan has always had a cornerstone of quality loans. These regulations should make things less expensive for my customers. The increased documentation requirements will hurt the self-employed individual's ability to borrow and this is not the right thing to do for our country.