Recent changes to the rules governing qualified mortgage lending could make it easier or cheaper for some prospective homeowners to get a home loan.
The Consumer Financial Protection Bureau last week announced the finalization of two rules for lenders issuing qualified mortgages, or QMs. Many mortgages today are qualified, thanks to rules put in place after the financial crisis; for example, qualified mortgages cannot include spurious practices such as interest-only or balloon payments. QMs also were unavailable to people who had too much debt relative to their income—until now. The new rules do away with a requirement that private lenders cap a potential borrower’s maximum debt at 43% of their income. The change could help more people get a qualified mortgage, which is typically more affordable for borrowers than nonqualified loans.
Instead of debt-to-income ratio requirements, the new rules condition QM status on a loan’s annual percentage rate, which is set by the lender after taking into account factors like a buyer’s credit score and cash reserves. The APR is “highly correlated” with early delinquency rates, the Bureau said in the new rule’s official interpretation . Using a method that compares a borrower’s APR to the average rate offered to highly-qualified borrowers is a “more holistic and flexible measure of a consumer’s ability to repay than [debt-to-income] alone,” the Bureau said. But the new APR threshold is not the only determining factor. For a loan to be a QM, a lender must still assess and document the borrower’s ability to repay the mortgage.
In practice, the changes will make qualified mortgage credit more available to otherwise-qualified borrowers with higher levels of debt or non-W-2 income—like self-employed borrowers, gig economy workers, and buyers with high student loan debt, says Karan Kaul, senior research associate at the Urban Institute’s Housing Finance Policy Center.
For consumers, getting a qualified mortgage means fewer fees and easier access to credit in times of economic upheaval, says Keith Gumbinger, vice president of mortgage website HSH.com. “It doesn’t necessarily mean more people can get loans, but it means that more people can get QM loans—and that they would generally retain access to credit in times of financial market stress,” Gumbinger told Barron’s.
Consumer protection groups have applauded the removal of the debt-to-income ratio. “Research has demonstrated the limited predictive value of strict [debt-to-income] limits as well as its effect of excluding credit-worthy borrowers, disproportionately people of color, from QM loans,” said Center for Responsible Lending president Mike Calhoun and National Fair Housing Alliance CEO Lisa Rice in a joint statement.
The qualified mortgage designation was created by the Dodd-Frank Act in 2013 and implemented by the CFPB as a way to regulate mortgage lending in the wake of the subprime mortgage crisis. In addition to mandating that lenders screen borrowers based on their ability to repay mortgage debt, it also put limitations on the types of loans that could be considered qualified mortgages, excluding riskier products like loans with negative amortization, and loans with an interest-only period or balloon payments. “We view the QM as built-in consumer protection,” says Peter Carroll, executive of public policy and industry relations at property data company
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(FMCC) already had the flexibility to lend qualified mortgages to buyers with higher debt loads or nontraditional income streams, the new changes extend that flexibility to private lenders. “[The new rule] has made the playing field more level between the private sector and Fannie and Freddie,” says Kaul. That new flexibility provided to private lenders is what will increase accessibility to qualified mortgage loans, said CoreLogic’s Carroll.
Under the new rules, most mortgages that otherwise fit the QM definition can be considered a qualified mortgage if the interest rate is less than 2.25 percentage points above the average APR assigned to a highly-qualified buyer. For most common mortgages, the Bureau says, that threshold “strikes the best balance between ensuring consumers’ ability to repay and ensuring continued access to responsible, affordable mortgage credit.”
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