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Wednesday, January 1, 2014

‘Qualified Mortgage’ & ‘Ability to Repay’ Rules Take Effect Jan. 10th

[Published Jan. 2, 2014, in the Jeffco editions of the Denver Post's YourHub section. An abbreviated version also appeared in five Jefferson County weekly newspapers.]

You’re probably quite aware that the housing crisis of 2008 came about in part because lenders were writing mortgages that many borrowers could not reasonably be expected to repay.

Well, starting on Jan. 10th, lenders will be subject to an Ability-to-Repay rule issued by the Consumer Financial Protection Bureau, implementing sections 1411 and 1412 of the Dodd-Frank act passed in 2010. This rule requires mortgage lenders to consider consumers’ ability to repay a mortgage before extending credit to them.

I often hear buyers complaining about the petty documentation demands placed on them during the loan approval process. Rita and I experienced this ourselves when we bought our home in 2012.

Lenders and their underwriters are driven by the fact that they want their loans to be saleable to Fannie Mae or Freddie Mac after closing, and if they fail to dot some i or cross some t, Fannie or Freddie might require them to buy back the loan. It doesn’t take many loan buy-backs to deplete a mortgage company’s working capital and even put it out of business.

Even if the lender can survive such buy-backs, the lender’s underwriters might reasonably worry about losing their job if they make a mistake that results in a mortgage buy-back. That is why underwriters can appear (and be) so unreasonable in their sometimes petty documentation demands.

So, now another layer of documentation is added under this Ability-to-Repay rule. This is not to say that it’s a bad idea, but the above dynamic will no doubt make the process even more stressful and tedious than it already is.

Lenders must consider and document eight specific criteria:

1) the borrower’s current or projected income and assets;

2) the borrower’s income and employment status, if any;

3) monthly loan payments, including possible adjustments, if applicable;

4) monthly payments on any second mortgages applied for;

5) monthly costs of HOA dues, insurance and property taxes;

6) other financial obligations of the borrower, such as alimony;

7) the borrower’s debt-to-income ratio; and

8) the borrower’s credit history.

One lender I interviewed said that most of these criteria are already part of the approval process and described the new rule as “so much noise.” 

The rule, however, does provide new protection for the lender against lawsuits by borrowers claiming that the lender granted the loan irresponsibly because the lender will now be able to show they met the requirements of the Ability-to-Repay rule.

Loans that meet the Ability-to-Repay rule's minimum verification standards, several additional underwriting requirements, limitations on points and fees, and loan feature limitations are called Qualified Mortgages (QM). The QM rule creates a presumption that the homeowners received a mortgage that they could afford.

The rule applies to many mortgage loans but excludes home equity lines of credit, timeshare plans, reverse mortgages and temporary loans with terms of 12 months or less.

I want to thank my mortgage partners -- Lila Manley of Pinnacle Mortgage, Bruce Gustafson of Crestline Mortgage, and Don Opeka or Orion Mortgage in particular -- for their help in researching this article.

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