What Members Need to Know Regarding Changes to the Home Financing Process
Several new regulations that went into effect at the beginning of this year could delay loan closings. In some cases, creditworthy borrowers could be denied access to affordable mortgages, which would harm home sales.
NAHB is working with regulators and lawmakers to avert such a scenario and ensure a sufficient flow of credit for the industry.
Here’s what home builders need to know about the new lending rules for 2014:
Ability-to-Repay Rule and the Qualified Mortgage (QM) Now in Effect
The ability-to-repay rule, which stipulates that borrowers must be able to repay home loans issued to them, went into effect on Jan. 10 as required under the Dodd-Frank Act. This rule applies to all mortgages and will define the mortgage markets for years to come.
The ability-to-repay rule, which includes the definition of a qualified mortgage (QM), establishes underwriting as well as product criteria for mortgage originations and provides consumer protections to ensure that lenders determine that a borrower has the means to repay a loan. In the event of a default, consumers will have some ability to challenge a lender’s underwriting in a defense against foreclosure.
The QM, as defined by the Consumer Financial Protection Bureau (CFPB), sets specific parameters that lenders can use to demonstrate that they have complied with the ability-to-repay rule and provides some protections from liability in the case of a borrower default.
Lenders can continue to offer products that do not meet the QM criteria, but may be subject to increased legal liabilities in the event of a borrower default.
The CFPB’s new QM standard:
Includes many of today’s sound mortgage products, including fixed-rate and adjustable mortgages.
Caps loan origination fees at 3% of the loan amount.
Requires borrowers to have a debt-to-income ratio less than or equal to 43%.
Has no downpayment restrictions.
Creates a separate QM safe harbor for small community banks that provide loans in rural and underserved areas.
While the ability-to-repay regulation applies to all mortgage lending, it does include a few noted exceptions such as construction-to-permanent loans of 12 months or less and loans provided by state housing finance agencies.
The U.S. Department of Housing and Urban Development (HUD) has released a separate QM definition for loans insured or guaranteed by the agency, such as Federal Housing Administration (FHA) loans.
The HUD QM definition imposes a 3% cap on points and fees, but otherwise does not change FHA single-family mortgage requirements. Lenders must follow current FHA underwriting criteria. Importantly, the HUD QM rule does not include the 43% debt-to-income limit.
Loans provided through the U.S. Department of Agriculture Rural Development and the U.S. Department of Veterans Affairs are deemed to be qualified mortgages and these agencies are under the same mandate as HUD to develop their own QM rules.
Loans that are eligible for purchase by Fannie Mae and Freddie Mac are also considered qualified mortgages. This classification will remain in effect for seven years or until Fannie Mae and Freddie Mac are no longer in conservatorship.
NAHB Works to Keep Credit Flowing
Through comment letters, congressional testimony, meetings with CFPB officials and coordinating with industry partners, NAHB worked with regulators to ensure that the ability-to-repay rule provides home buyers access to affordable mortgages, contains adequate consumer protections and provides lenders proper incentives to make home loans to creditworthy borrowers.
NAHB worked extensively to get as broad a QM definition as possible, and was able to get several provisions in the rule to help keep credit flowing during this transition period. The fact that loans eligible for purchase by Fannie Mae and Freddie Mac are considered qualified mortgages, including loans with a debt-to-income ratio greater than 43%, provides greater flexibility for prospective home buyers. A safety net is also provided through the broader QM definition for FHA-insured mortgage loans.
NAHB is hopeful that lenders eventually will expand the mortgage menu and underwriting box as they adjust to the rule.
A further analysis of the QM rules by NAHB can be found here.