The federal Consumer Financial Protection Bureau’s new qualified mortgage rule may curb housing demand by restricting mortgage credit access.
Basic tenets of the rules can be confusing. Near term, implications are not clear. Expect the government to tweak the rules as impacts on the housing market are recognized.
Mortgage reform is part of the far-reaching Dodd-Frank Wall Street Reform and Consumer Protection Act. Mortgage reform includes requirements to ensure a borrower’s “ability to repay,” prohibits unfair lending practices, establishes penalties for irresponsible lending, expands consumer protection for certain mortgages and requires more disclosure and consumer counseling.
Dodd-Frank spawned the “ability-to-repay” and qualified mortgage rules. Dodd-Frank also created the independent Consumer Financial Protection Bureau.
A qualified mortgage is a home loan that meets applicable standards set forth by the federal government. Key components of the qualified mortgage rule include no excessive up-front points and fees, no toxic loan features and limits on debt to income ratios.
Toxic loan features might include interest-only loans, negative amortization loans, terms exceeding 30 years and, in some cases, balloon-payment requirements.
The rule requires that borrowers’ debt-to-income ratios not exceed 43 percent. Some of these requirements are common sense. Many local lenders already adhere to these regulations.
Creditors who generate loans that meet qualified mortgage restrictions will receive some level of protection against legal action from borrowers.
These qualified mortgage loans will be designated “Safe Harbor” or “Presumption of Compliance” qualified mortgage mortgages. Safe Harbor Qualified Mortgages will provide lenders with the greatest degree of legal protection.
Qualified mortgage loans that only receive the “Presumption of Compliance” provide the creditor with less legal protection. Mortgage loans falling into either category do not necessarily need to meet all of the “ability-to-repay” requirements.
Non-qualified mortgages provide neither automatic safe harbor nor presumption of compliance for the creditor. Clearly, non-qualified mortgages become far less attractive in the mortgage marketplace.
Typical of many laws, the devil is in the details. The complex Dodd-Frank legislation is loaded with details. Many details and rules are yet to hatch.
“In a nutshell, we are only about halfway through all of the changes required by Dodd-Frank,” said Laura McKinney, vice president and credit and loan administration manager for the First National Bank of Durango.
Impacts of the qualified mortgage rule on the local housing market will become clear in coming months. Near term, expect some possible delay in mortgage underwriting as lenders become familiar with the amorphous regulations.
If qualified mortgage rule restrictions do stall the housing recovery, housing industry advocates will lobby Congress to act quickly to ease relevant portions of the qualified mortgage restrictions.
Sustained recovery in the housing market is too important for economic recovery in the U.S.
Bob Allen is a real estate appraiser and analyst with Allen & Associates in Durango. He can be reached at firstname.lastname@example.org.