January 10, 2014 looms as yet another housing industry witching hour with implementation of the Qualified Mortgage Rule (QM). QM carries with it the potential to restrict consumers as well as traditional sources of capital for the market, which will inevitably impact growth in our sector. However, QM aspires to bring stability and additional credibility to a mortgage industry often cited as a key factor in the recession of the last cycle. Restrictions versus credibility --- that’s the question to ponder today.
Broadly defined, QM sets specific criteria for a home loan that meets certain standards set forth by the federal government as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. Interpretation and implementation of QM is overseen by Consumer Financial Protection Bureau (CFPB), the agency created as part of that legislation for enforcement purposes. After more than two years of discussion and debate, the following provisions stand out as key concepts of QM for lenders to follow. These in turn will provide legal protection against borrower lawsuits as well as increased confidence that GSEs won’t require “buybacks” of defaulted loans that have been guaranteed by Fannie or Freddie:
- Elimination of "low doc" or "no doc" loan programs
- Adherence to "ability-to-pay" provisions, inclusive of tighter underwriting based on borrower's ability to pay over the long term
- Elimination of interest-only, negative amortization, teaser-rate, or other loan programs deemed "exotic"
- Loan term not exceeding 30 years
- Debt-to-income ratios not exceeding 43%
- Total disclosed fees not exceeding 3%
While QM hopes to rid the mortgage industry of risky loan products and ensure that borrowers have the ability to meet their mortgage obligations, it poses three very clear and present dangers that can’t be ignored. First, QM excludes a huge segment of borrowers who have difficulty meeting stricter underwriting standards, but aren’t necessarily credit risks. Second, while more risky products will be eliminated as a result of QM, so are the choices borrowers have in choosing loans that fit their budget and lifestyle. Remember, our current culture of tight credit has made “exotic” loans harder to qualify for as well, so our current environment has actually generated a strong class of qualified borrowers with less likelihood of defaulting on a mortgage. Third, and potentially crippling to the industry, is the 3% fee cap. Mortgage brokers stand to suffer the most from this cap. Already operating under tight margins as well as a host of regulations limiting what they can charge, broker fees may not be able to exceed 1% of the proposed 3% total disclosed fee rule on conforming loans. Today’s mortgage broker fills an invaluable niche for borrowers who don’t fit the standard underwriting mold. We could lose yet another borrower financing avenue if there is a new shakeout in the mortgage broker industry, and this could eventually impact demand with fewer borrowers in the mix.
It appears, then, that QM is more about choice --- from the borrower perspective --- than it is about restrictions or credibility. While GSEs and lenders win by only writing loans for a predefined criteria, borrowers that don’t fit the criteria lose. Peak has been exploring a number of opportunities for 2014 to create more options for borrowers that find themselves even more disenfranchised by lender and government standards. A healthy housing sector requires a strong mix of investors, inventory, credit, and buyers. More choices of credit for buyers equates to long-term stability for the housing sector.