Ability to Repay and Qualified Mortgage Loans

You have likely heard that in January 2014, The Consumer Financial Protection Bureau (CFPB) is implementing new rules that are a result of requirements enacted into law by the Dodd-Frank Wall Street Reform and Consumer Protection Act. I’d like to take this opportunity to explain briefly what the Ability to Repay (ATR) is about and define what a Qualified Mortgage (QM) is.

WHAT IS THE ABILITY TO REPAY (ATR)? Under this new regulation all lenders are required to underwrite and document the borrower’s ability to repay the mortgage and determine whether the loan meets minimum underwriting requirements. There are eight minimum factors to consider:

• Income and asset verification

• Current employment status and likelihood of continuance

• The monthly payment on the covered transaction

• The monthly payment on any simultaneous loan(s) on the covered transaction

• The monthly payment for mortgage related obligations such as property taxes, home owners insurance, etc.

• Verification of other monthly debts including alimony and child support

• The monthly debt-to-income (DTI) ratio or residual income

• Credit History

Loans underwritten to ATR standards fall in to two categories: Qualified Mortgage (QM) and non-Qualified Mortgage (non-QM).

WHAT IS A QUALIFIED MORTGAGE (QM)?   To be considered a Qualified Mortgage, the following criteria must be met:

• Maximum debt-to-income ratio of 43%

• Limit of 3% points and fees cap for loan amounts greater than $100,000

• Maximum 30-year loan term • Must follow certain interest rate guidelines

• No negative loan features, such as:  Negative amortization or  Balloon payments

• No Interest only loan programs

WHAT IS A NON-QUALIFIED MORTGAGE (NON-QM)?  Loans underwritten to ATR standards that do not receive a QM designation are commonly referred to as non-QM loans. Non-QM loans are still regarded as high quality loans but they do carry greater risk. Key characteristics of a non-QM loan:

• Debt-to-income ratio’s are over 43%, but can use residual income and other compensating factors to still qualify.

• Terms can include interest only, balloons and 5% life caps on ARM (adjustable rate mortgage) products

• Rates, points and fees can be higher

• Less legal protection for the lender should the borrower default

SO WHAT IS THE CONSUMER IMPACT?

• Some Lenders may choose not to originate non-QM loans •

The 3% points and fees cap can act as a safety net, providing borrowers with the confidence that their fees will never exceed 3% of the loan amount

• These rules can protect consumers from entering into loans with terms they may not be able to afford

• There is a seven-year temporary exemption for loans that do not meet the QM standards, which may allow consumers with higher debt-to-income ratios to still qualify:

• The loan must be eligible for purchase or insurance by one of the agencies, such as Fannie Mae, Freddie Mac, HUD, etc.

• The 3% points and fees cap must still be met so this ensures costs stat reasonable

• Lenders may still originate non-QM loans when a consumer can demonstrate the ability to repay the loan

• Additional documentation may be required to show that a consumer has the ability to repay the loan.

We are  happy to answer any question you may have about these new requirements and how they could affect your loan or if you are already being told that you do not qualify with your current londer. . Please call or email me with any questions.

Evie Knoke

206-310-9551

Evie.Knoke@Homestreet.com

Market Update for Mortgage Rates

Last Week in Review

 

 

 

“I Can See Clearly Now.” Johnny Nash may have hit number one on the charts with this classic tune in 1972, and forty-one years later the markets would sure love a clear sign regarding when the Fed may taper its Bond purchase program known as Quantitative Easing.

Remember that the Fed has been purchasing $85 billion in Bonds and Treasuries each month to stimulate the economy and housing market. This includes Mortgage Bonds, to which home loan rates are tied. Last week, the minutes from the Fed’s October meeting of the Federal Open Market Committee revealed that members did discuss tapering these purchases–but there was no clear sign when tapering would begin. This led to a volatile Wednesday, causing both Stocks and Bonds to worsen immediately after the minutes were released.

In housing news to note, Existing Home Sales for October fell by 3.2 percent due to a rise in home loan rates and housing prices. This was the second month of declines, as there were 5.12 million units sold annualized, below the 5.20 million expected. In addition, the National Association of Home Builders reported that its Housing Market Index fell to the lowest level since June, but the figure does remain in positive territory. Meanwhile, Retail Sales rose more than expected in October, as the decline in gas prices gave consumers extra money to spend, while both consumer and wholesale inflation remain tame.

What does this mean for home loan rates? The housing sector has been on an improving streak, but as the reports above show, these improvements could be hindered if home loan rates continue to rise. One thing is clear: The Fed has said that economic reports will be a key factor regarding when it begins to taper its Bond purchases. But whether this will happen before or after the new year remains to be seen.

The bottom line is that home loan rates remain attractive compared to historical levels, and now remains a great time to consider a home purchase or refinance. Let me know if I can answer any questions at all for you or your clients.

Rates Improve on Weak Jobs Report

Better late than never. With the government shutdown over, the Jobs Report for September was finally released–and the markets and home loan rates reacted.

The Labor Department reported that 148,000 new jobs were created in September, below the 183,000 expected. For July and August, the numbers were revised higher by a total of 9,000 jobs. The Labor Force Participation Rate, a measure of how many people are looking for work, was unchanged at 63.2 percent after falling in August to a 35-year low.

The Unemployment Rate hit a 5-year low in September, falling to 7.2 percent. This was fueled to some degree by workers entering retirement and those Americans opting out of the workforce in a stagnant job market. And in the latest Weekly Initial Jobless Claims Report, claims fell by 12,000 in the latest week but still came in above expectations. The bottom line is that we are simply not seeing any meaningful improvement in the labor market.

What did this mean for home loan rates? Remember that weak economic news normally causes investors to move their money into safe investments like Bonds. This includes Mortgage Bonds, to which home loan rates are tied. We saw that dynamic in the markets last week, as Bonds rallied after the weak Jobs Report was released, helping home loan rates reach their lowest levels in four months.

Also still helping Bonds and home loan rates is the Fed’s current Quantitative Easing program, in which the Fed has been purchasing $85 billion in Bonds and Treasuries each month to stimulate the economy and housing market. With key economic reports delayed due to the shutdown–and with the September Jobs data weaker than expected–there is not much chance the Fed will taper its purchases at its meeting this week. This should help keep home loan rates attractive through the remainder of 2013.

The bottom line is that home loan rates remain attractive compared to historical levels and now remains a great time to consider a home purchase or refinance. Let me know if I can answer any questions at all for you or your clients.

NAHB Housing Market Index

Featured Chart for Friday, October 18th

NAHB Housing Market Index Declines

 

The National Association of Home Builders reported that its Housing Market Index fell to 55 in October from the September reading of 57, but up from the low for the year of 41 registered in April. Readings above 50 signal that builders are more positive regarding current conditions.

 

 

 

Mortgage Misconceptions

Loans are hard to get.
There is plenty of funding available for home mortgages and several very good loan programs. Although lenders have tightened their guidelines, low interest rates and programs with flexible credit requirements are still available.

I need to have perfect credit.
Even if you have less than perfect credit there are still safe, secure mortgage financing options available. Reputable mortgage lenders employ knowledgeable loan officers who can evaluate your financial situation and help you get the financing you need to fit your budget.

Zero and low down payment programs are gone.
Not true. Although not as prevalent as in the past there are still several loan programs offering low down payment mortgages, like FHA — which has loans starting at just 3.5% down. If you’re a veteran, VA loans are available with zero down for many borrowers. And other programs, such as USDA Rural Development loans or Hawaiian Home Lands loans may be available to some borrowers.

Adjustable Rate Mortgages (ARMs) are bad.
As with any loan you need to assure you can make the payments now and in the future but Adjustable Rate Mortgages (ARMs) can be a good tool. ARMs come with a lower initial fixed interest rate for a set period of time (usually 3,
5 or 7 years). After the time period passes payments generally adjust to the prevailing market rate plus a small percentage. Please give me a call for more information. I look forward to hearing from you.