The Consumer Financial Protection Bureau (CFPB) recently issued more parameters for the evolving qualified mortgage (QM) standard.
Among other requirements, a QM — not to be confused with the downpayment-heavy qualified residential mortgage (QRM) — may not:
- include interest-only payments;
- include balloon payments; or
- have a term over 30 years.
In addition to being a fully amortized mortgage, for a mortgage origination to be designated as a QM, the borrower’s total debt-to-income ratio (DTI) may not exceed 43%.
CFPB President, Richard Cordray, said the goal of the CFPB is to protect consumers from risky lending practices while keeping mortgages within their reach. The CFPB recognizes the QM is not to be designed as a one-size-fits-all option for borrowers.
The CFPB expressed confidence in the underwriting standards of credit unions and other small, community lenders, and encouraged them to continue originating loans as usual, whether or not these loans meet QM requirements.
However, credit unions fear any non-QM loans they originate will be branded as risky and expose these institutions to borrower lawsuits or penalties from federal bank examiners. More instructive to credit unions, Fannie Mae and Freddie Mac have recently announced they will not buy non-QMs. While credit unions keep many adjustable rate mortgages (ARMs) on their books, their best long-term interest — solvency — is protected by retaining the option to sell mortgages on the secondary market.
first tuesday insight
These rules don’t signal lenders’ demise, but only limit their conduct to socially acceptable norms.
QM legislation may be new, but the now codified standards which it establishes are not. Some types of loans have always been high risk for anxiety-prone homebuyers and homeowners, such as:
- mortgages with balloon payments;
- mortgages with negative amortization;
- mortgages with interest-only payments; and
- borrowers with total DTIs over 43%.
If they chose to exercise it, community lenders may have a greater ability than big banks to independently investigate their borrowers’ ability to repay mortgages. But last time we checked, community lenders do not personally investigate and drill down into every detail of a borrower’s financial history and future prospects when processing a loan application.
Instead, they rely totally on credit reporting agencies to validate a borrower’s financial history, and third-party appraisers to verify the fair market value of property used as security for the loan. No independent banker’s judgment exercised here.
Consider this: if small lenders calculate a borrower’s ability to repay a loan using the same analytical methods as big banks, why should their lending standards be any more lax?
Equal treatment for all mortgage lenders as a class in a uniform effort only government can provide is necessary to avoid lenders doing further damage to our nation’s housing policies.
Community lenders are justified in fearing backlash from originating non-QMs. But the solution to their present turmoil is simple: don’t make non-QMs, unless they wish their depository to have solvency issues as we hit the next recession.
If this causes a huge shift in the way community lenders originate mortgages, then they have earned the imposition as much as big banks. Profits during good and bad times are the better structured capitalism, not socialized losses and financial crises during recessions after profits have been privately taken.
Re: “Local lenders say U.S. ‘qualified mortgage’ rules go too far” from The Los Angeles Times