The Dodd-Frank Qualified Mortgage – The Future of Residential Housing
by Ken Trepeta
The Dodd-Frank Qualified Mortgage, or QM, as it is known, is likely to shape the future of housing finance for years to come. The QM comes from the “ability to repay” anti-predatory lending provisions of Dodd-Frank. The original rule proposal was issued by the Federal Reserve in the summer of 2011. However, responsibility for finalizing the rule now lies with the Consumer Financial Protection Bureau (CFPB) who has until the end of 2012. NAR has long supported commonsense underwriting where the borrower’s ability to obtain a loan is based on their ability to repay the loan. However, the CFPB must strive to get this rule right in order to avoid unduly tightening credit and excluding millions of otherwise qualified borrowers from having access to mortgage credit.
The QM would be a loan that, on its face, would meet the ability to repay standards and have certain features associated with “safe” lending. Under the first proposed approach, a “safe harbor” would be available for a mortgage that meets the following requirements:
(1) It does not include negative amortization, interest-only payments, balloon payments, or have a loan term exceeding 30 years.
(2) The total points and fees do not exceed 3 percent of the total loan amount.
(3) The income or assets of the borrower have been considered and verified.
(4) With regard to underwriting:
a. It is based on the maximum interest rate in the first five years.
b. It uses a payment schedule that fully amortizes the loan over the loan term.
c. It takes into account any mortgage-related obligations.
In the alternative approach, a rebuttable presumption of compliance would be available to a mortgage meeting the requirements listed for the safe harbor, as well as the following additional requirements, including considering and verifying:
(1) The consumer’s employment status
(2) The monthly payment for any simultaneous mortgage
(3) The consumer’s current debt obligations
(4) The monthly debt-to-income ratio or residual income
(5) The consumer’s credit history
The CFPB has flexibility in putting this rule together and could, in fact, combine elements of both items above. The industry strongly believes that the CFPB must give a true safe harbor for a wide array of loans in order to ensure maximum availability of affordable credit and competition amongst lenders. While there is litigation risk for both a safe harbor approach and a rebuttable presumption approach, the risk is much greater and more costly on rebuttable presumption. To put it plainly, if you meet the safe harbor, you can get out of court quickly. With a rebuttable presumption, even if you meet the test, one must go through many more costly litigation stages before liability is determined. These additional costs could amount to tens of thousands of dollars.
We are already in a risk-averse mortgage market. Adding additional litigation risks will most certainly cause credit to tighten further. In the rebuttable presumption case, that risk aversion will be even greater with some lenders attempting to avoid any risk at all by only making loans to wealthier clients, those who can afford high down payments, and those with pristine credit scores. In short, people who need access to mortgage credit the most are the least likely to get it.
Nobody is for giving people risky loans. We have already seen the disappearance of subprime and risky products. Credit policies are already tight. The QM should allow for broad access to safe and affordable mortgages for people across the socio-economic spectrum. One cannot totally eliminate risk and it is foolish to try. The CFPB must be very careful in developing the QM rule lest they wind up protecting consumers not by ensuring they have access to safe mortgages but rather ensuring they have no access to mortgages at all.
Ken Trepeta is the director of Real Estate Services for the National Association of REALTORS®.
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