New Qualified Mortgage (QM) Rule
With the new qualified mortgage rule aimed at avoiding a recurrence of the mortgage meltdown, the need for lenders and borrowers to comprehend its implications is extremely important. The new mortgage rule by Consumer Financial Protection Bureau (CFPB), resulting from the Dodd-Frank act, enable healthier lending practices. Let's take a look at what it says, and how it tries to shake off poor underwriting practices.
The primary idea behind the QM rule is to bring in 'safe' mortgages or qualified mortgages, where the lenders duly ensure that the borrower has the ability to repay the loan. Also, it protects the lenders against lawsuits filed by borrowers in future, either in the form of a safe harbor or rebuttable presumption on the issuance of qualified mortgages. This rule would innately prevent casual lending. "It really is pretty basic," says Richard Cordray, head of the CFPB, who feels that this is like going back to basics in mortgage lending.
However, lenders can still give loans without following these guidelines, but, in that case won't be protected against lawsuits filed by borrowers, if any.
No to 'No-Doc' or 'Less-Doc Loans'
What primarily led to the financial crisis was lenders were giving away home loans to borrowers on fancy interest rates without closely checking the financial health of the borrowers. But now with the 'ability to repay' check, lenders will be forced to verify the financial health of the borrowers by duly verifying the necessary documents and their assets. This means lesser options for home buyers, and would force them to opt only for loans that fit their pockets, which would however in future be rewarding both to the borrowers and the lenders.
No to 'Interest Only' Loans
'Interest only' loans were an instant hit among the middle-class buyers as it required them to pay only the interest part for a certain amount of time before the key principal component kicked in. This led to many borrowers opting for the loan initially, as paying just the "interest component" looked easy, but it often ended as the bad debt when the buyers were unable to withstand the huge repayment amounts when the principal part was loaded on to their EMIs.
The new rule now fully prevents 'interest only' loans, which means many borrowers now would be deprived of this repayment cushion. However, on the contrary, some lenders like the Bank of the West say that they will continue to do interest-only loans, applying due diligence.
Other Key Guidelines
- Loan terms cannot exceed 30 years, beyond which it is considered as risky loans
- Under 'points and fee', incurred by the borrower as processing and closing charges for the loan, the new rule mandates that it cannot be more than of 3% of the total loan amount, however certain exceptions are made for 'bona fide discount points' on prime loans
- A borrower's total debt should not be more than 43% of his total income; the debt includes his loan repayment amount, credit card, car repayment dues, etc. This limit of 43% can only be breached if the loan is supported by Fannie Mae or Freddie Mac or backed by any federal housing agency like FHA
What the New QM Mortgage Rules Deliver?
- It brings in healthier lending practices, ensuring that borrowers only go for home loans within their paying capacity
- An estimate by Goldman Sachs suggests that at least 50% of the recent home loan defaults could have been avoided if the QM rule was in place. This speaks a lot about the healthy impact new QM rule has in reversing the loosely held lending practices earlier
- Though the new rules make it difficult for borrowers to get loans, it is presumed that over 92% of loans that are given fall under the new QM mortgage rules as lenders have already exercised caution after the financial crisis
- Qualifying for a mortgage as per the new rule would now become the priority of the lenders rather than relying on the fancy loan offers
Changes to Systems and Processes
This definitely calls for a change in the mortgage systems and processes in place for quite some time. Even though OM rule is widely presumed to be more time consuming process, Flatworld Solutions has already set things in motion and is delivering faster processes for our clients (mortgage lenders and brokers) as per the new QM mortgage rules. For any QM rule related query, contact mortgage experts at Flatworld Solutions today!