This January, the Dodd-Frank Wall Street Reform and Consumer Protection Act was implemented with new and significant rules to the lending industry that will greatly impact the housing market. Two of these new rules are the qualified mortgage rule (QM) and ability to repay rule (ATR) intending to protect consumers by strengthening underwriting standards, requiring that lenders obtain complete documentation of income, assets, employment and other documents reflecting a more accurate prediction of the consumer’s ability to repay their mortgage.
While this rule seems like an obvious one, some lenders are concerned that the ability to repay rule is too broad and could leave them exposed to risks and associated legal costs of not complying with the ATR, even after strengthening their standards to fit compliance.
From those concerns grew the qualified mortgage rule, which provides an exemption to give lenders clearer though stricter rules to comply with and which better defines and limits their legal liability. Among other requirements, the QM rule features a maximum of 3% for points and fees, a cap of 43% on the back-end debt-to-income-ratio, and prepayment penalties. The 43% cap on the debt-to-income ratio could have a big impact on the housing market considering that 14% of mortgages originated by Freddie Mac in 2013 would not have met this requirement, and only 5% of prime securitized loans had a DTI higher than 43%.
Another rule as part of this reform is the risk retention rule which requires lenders to retain a portion of the mortgage backed securities they issue as a means to require them to share in the risk of the mortgages they issue. However, this rule creates higher cost to the lenders, which will ultimately be passed onto the consumer. There is also a slight exception to this rule called the qualified residential mortgage rule that aims to protect low risk consumers by allowing their loans to be securitized without risk retention, which would leave them exempt from the added costs high risk consumers would have from the risk retention rule.
For more information on the new rules created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, take a look at this article from the National Association of Realtors.
If you have questions about how these new lending rules will help you, let us know, and we will be happy to set you up with one of our trusted lenders. Just email Joe at josephm@desertdimensions.com