If you’ve been thinking about refinancing your mortgage or are preparing to buy a home, you may or may not have heard about the new mortgage rules that took effect January 10 of this year. In 2010, as a response to the housing crisis of the last decade, Congress wrote the Dodd-Frank Wall Street Reform and Consumer Protection Act, typically referred to simply as Dodd-Frank. This sweeping legislation combined a cadre of regulatory agencies under one roof and today, financial regulation from credit cards to home loans is government by the Consumer Financial Protection Bureau, or CFPB.
Mortgage lenders far and wide have known about many of the new mortgage rules announced last year and implemented in 2014 and the one most talked about is the qualified mortgage, affectionately referred to in the mortgage industry as QM. And some lenders are scare. Should you be?
The new QM guidelines provide lenders a so-called “safe harbor” that protects them from litigation should something go wrong with the loan after it has been approved and funded. To get this protection, the lender agrees not to approve a loan that:
- Is longer in term than 30 years
- Has interest only payments
- Has a balloon payment
- Has negative amortization
- Fees that exceed 3 percent of the loan amount
At the same time, the loan also must pass the Ability to Repay rule. The ATR requires that a borrower cannot have a debt to income ratio higher than 43. If any of these requirements are not met, the loan is not eligible for QM status and cannot be sold in the secondary market.
Does that matter to you? A few years ago, negative amortization and “no documentation” loans were rampant but they’re nowhere to be found today. Lenders haven’t made them since the crash and the mortgage companies who promoted them are largely out of business. Initially, lenders thought that the QM guidelines along with the ability to repay rule would keep many prospective homeowners on the sidelines. Yet in reality, lenders have been following similar guidelines all along.
The new rules are still fresh and there’s no hard data to see if the QM guidelines really do hurt the real estate market. But so far, QM news just might be no news at all.