By Jay Levitt, Guaranteed Rate
In 2010, the
Dodd-Frank Wall Street Reform and Consumer Protection Actwas signed into law in order to prevent a recurrence of the 2008 housing and financial crisis. Included in the act are the most significant regulations to the U.S. financial system since those that followed the Great Depression. One regulation that will begin this month is the application of the Qualified Mortgage (QM), which places new guidelines of mortgages designed to create safer loans. Lenders who comply with the QM standards will receive legal protection against borrower law suits. Below are the characteristics of QM loans:
- The QM limits the points and fees charged by the lender during the application process to 3%.
- No high-risk loan features such as interest-only, negative –amortization, terms beyond 30 years, and balloon loans.
- Borrowers must have a debt-to-income ratio no higher than 43%. In other words, borrowers’ current monthly debt payments -- credit cards, auto loans, student loans -- and monthly mortgage payments cannot exceed 43 percent of their monthly gross income.
So how will this affect the real estate market in 2014?
According to the article “Will new rules make it harder to get a mortgage?” on the CBS News website, the chief economist at Zillow doesn’t think these new regulations will affect the real estate market at all. He believes, “As [interest] rates rise, lenders are going to loosen standards in order to attract customers.” Also, Fannie Mae and Freddie Mac are exempt from the government regulations and will still accept loans that exceed the 43 percent debt-to-income ratio.
This article suggests that lenders will be stricter in the beginning of the year. According to Bob Davis, vice president of the American Bankers Association, lenders are likely to be more cautious in the first six months following the application of QM mortgages. “Since there is substantial new liability if they get it wrong,” he said, “the way banks will protect themselves -- all lenders, really -- is they will be a little more conservative in their underwriting.” Ron Haynie, senior vice president of the Independent and Community Bankers Association, said, “There will also be some lenders that will make loans that will not be considered QM, but initially they’re going to be extremely cautious. It’s an unknown risk until that ability-to-repay action from the borrower hits the courts, and that won’t happen any time soon.”
Lisa Prevost from the
New York Timesbelieves that “the most immediate differences will be felt by borrowers at the higher and lower ends of the income scale.” Jumbo loans might not be as available because the borrower’s debt-to-income ratio might exceed 43 percent. And on the other end of the spectrum, borrowers with weak credit or higher debt-to-income ratios will not be able to get loans with points and fees that exceed 3 percent.
Here at Guaranteed Rate, we don’t expect the new regulations to make a big impact on our clients. More than 99.4 percent of out loans over the past 18 months have been compliant with the new regulations. As Victor Ciardelli, president and CEO of Guaranteed Rate, says, “At Guaranteed Rate, responsible lending has always been a company priority, so the principles of the new Qualified Mortgage guidelines are something we’ve supported and have been implementing for quite some time.”
Guaranteed Rate will also still offer options for buyers who don’t comply 100% with the new regulations, but it will require additional documentation to ensure the strength of the loan package.
If you’re interested in finding out how the new qualified mortgage regulations might affect you, please call me at 1-800-413-6001 anytime. Always at your service, Jay Levitt at Guaranteed Rate.