The beginning of the mortgage meltdown began over six years ago. The regulatory changes have continued as the federal government tries to make sure that there are better controls and oversight in place that help to avoid a repeat. In January 2014 a new set of rules that define a qualified mortgage will go into effect.
Conventional mortgages will be classified into three categories. There is the qualified mortgage, the temporary qualified mortgage and the ability to repay mortgage.
The qualified mortgage will be the cream-puffs. These are the loans with a debt to income ratio of 43% or less. This is not the largest class of mortgages that most companies process.
The second category, or the temporary qualified mortgage, is where the greater number of loans in the market come from. This category includes all loans that receive approve/eligible underwriting findings through either Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Processor. The maximum debt to income will likely not exceed 45% when the loan to values are at the maximum allowable level. It is important to note that Fannie and Freddie continue to modify and tighten guidelines. The overall evaluation of the combined risk factors that generate “approve/eligible” findings have become a moving target. If you currently have a transaction that is in process it is important that it be through the underwriting process prior to January 10th and ready for closing. If it is not, a transaction in process with approve/eligible findings might not continue to be approvable after that date. New construction transactions are especially vulnerable.
The final category is the ability to repay. These are loans that in the past have received “ineligible” findings that might have been able to proceed through a comprehensive underwriting and evaluation of combined risk. As of this date, no investors have stepped forward to purchase loans in this class. Until this happens, these loans will not move forward after January 10, 2014. There is hope in the industry that in time, investors will enter the market to fill an important gap and need. The cost for these loans (interest rate offered to the consumer) will likely be higher, if and when a market appears.
Federal agencies such as FHA and the USDA have the right under Dodd/Frank to create their own version of the qualified mortgage. It is likely that most of the mortgages that move forward will fall into the temporary qualified mortgage category. It is likely that the maximum debt to income (DTI) will not exceed 45% for these mortgages. Much of the market that, up until now, has exceeded a 45% DTI and has been less than a 50% DTI will no longer exist.
There is still much unknown. Investors are uneasy about interpretations of the qualified and temporary qualified mortgage categories. It makes it very difficult to be able to provide guidance to the parties to a transaction. There does need to be an awareness of the changes and communication will be imperative.
There will also be a 3% cap on fees that the buyer is charged that goes into effect in January 2014. The 3% applies to any fees that go back to the lender as income. It is important to understand what comprises the 3% and what does not. There are many situations that are currently in application that will no longer conform.
It will be interesting to see how these new rules affect who gets a mortgage and who does not. Lenders are required to demonstrate that they do not discriminate against protected classes when they make lending decisions. It may only be a matter of time before these more restrictive lending rules clash with the intent of Equal Housing regulations and laws. An unintended storm may be brewing on the horizon.