Today’s resilient capital market has the capacity to adapt readily to the pending Ability-to-Repay and Qualified Mortgage (QM) rules set to take effect January 10, 2014, according to a white paper CoreLogic released Friday.
The paper titled, ATR/QM Standards: Foundation for a Sound Housing Market, provides an overview of the rules themselves and examines their possible impact on the market.
The Ability-to-Repay rule requires lenders to take eight borrower attributes into consideration: “borrower’s current income or assets; current employment; the monthly payment for the loan, as well as any other loans secured by the same property; monthly payments for property taxes and insurance for which the borrower is responsible; current debt obligations; the borrower’s monthly debt-to-income ratio or residual income; and credit history,” CoreLogic explained.
A “Qualified Mortgage” meets a set of standards that provide “safe harbor” for lenders. These mortgages are automatically considered to be compliant with the Ability-to-Repay rule.
“To be QM-eligible, a loan has limits on points and fees to be paid, as well as underwriting features allowed,” CoreLogic stated.
For the first seven years under the new regulations, loans that meet the purchase requirements for the GSEs, or the underwriting standards for the Federal Housing Administration, the Veterans Administration, or the U.S. Department of Agriculture, “fall into a temporary exemption and are considered QM as long as the loan provides for no interest-only payments, has a term that does not exceed 30 years, and meets the QM limitations on points and fees,” CoreLogic stated in its white paper.
After much debate and push-back from the industry, theConsumer Financial Protection Bureau ultimately decided not to include a down payment minimum in the QM definition. In doing so, “the CFPB preserved the opportunity for higher LTV loans to remain QMs, when possible,” CoreLogic stated.
As for the Ability-to-Repay rule and QM’s effect on the industry, CoreLogic offers general support for the rules and suggests the industry will continue to prosper–-albeit with more caution than in the years leading up to the housing crisis.
“Making sure a borrower has the ability to repay is good business,” CoreLogic stated.
“Mortgages carry an expectation of repayment; it does not make sense to approve a loan application for a consumer who does not have the wherewithal to make regular interest and principal payments,” CoreLogic continued.
Some worry there will be no market for non-QM loans, wondering whether investors will be willing to take risks in such a segment of the market.
CoreLogic concedes, “It is fairly certain that the lending of the pre-crisis years will not return,” but suggests lenders will “figure out a way to deliver qualified and non-qualified mortgages in a way that meets all the regulatory requirements, incorporates sound lending and consumer protections, and makes a profit.”