What is all this about QM and ATR?
Happy Saturday morning. Yes, it’s still cold and another storm is coming, but it’s not the weather I wanted to talk about this weekend. The storm I’m talking about is the implementation in the mortgage industry of QM (Qualified Mortgage) rules and ATR (The Ability to Repay). All lenders, not just Prosperity, have to adhere to these rules effective on January 10,, 2014. I’ll be sending out more information over the next few weeks, but here is a quick review.
A QM or Qualified Mortgage focuses on 3 main areas – 1) a limit on loan features, 2) a points and fee cap, and 3) relevant underwriting criteria. Lenders that originate loans to the QM standard are given a “safe harbor” against potential lawsuits for placing a borrower in an inappropriate mortgage. Of course, nothing can stop anyone from suing a lender, but this protection is important enough that many lenders may only do QM compliant loans. So what is that?
First, the limit on loan features will means no negative amortization or interest only periods. The maximum loan term is 30 years, and no balloon payments are allowed. Second, there is a maximum 3% cap on points and fees (with higher limits on loans below $100,000). And third, the maximum debt to income ratio is 43% unless a higher ratio is approved by the automated underwriting system (AUS) used by the lender. And, there will be undisclosed debt monitoring to pick up new debts taken out by a borrower after the loan application.
An interesting side note is that with less than 30 days remaining until implementation there is still no clear word from FHA, VA, Freddie Mac or Fannie Mae regarding how long the will still insure, guarantee, and/or buy loans that are approved by their AUS with debt ratios above 43%. They are today and they will after January 10th but no one know for how long?
The Ability to Repay (ATR) rules require lenders to use and document their approval of a borrower based on the following 8 items:
- Credit history
- Current employment status
- Current income or assets
- Monthly payment for the home loan (including all taxes, insurance, condo dues, ground rent, etc.)
- Monthly payments for all other loans on the property
- Mortgage obligations on all other properties a borrower owns
- Other debts the borrower has
- Debt to income ratio
Most lenders commonly use these 8 items today, but they are now a federal government requirement. Remember, all mortgage lenders are subject to these new rules. Many, including us have been underwriting to more restrictive guidelines since the market collapsed in 2007-2009 so there should not be a huge contraction of mortgage availability as a result. The biggest areas of concern are the 43% debt to income ratio requirement and only limited ability to use asset dissipation as a means to income qualify a borrower.
Mortgage bond prices finished the week near unchanged after starting on a good note. Rates improved Monday and Tuesday in the absence of economic data. That quickly reversed Wednesday in response to a reported budget deal Tuesday evening. The fear of the Fed tapering asset purchases was reignited as a result and mortgage interest rates shot sharply higher. The negative movement continued through Thursday. Stronger than expected retail sales data also pressured rates higher. Tame producer inflation data Friday morning kept things quiet that day. Mortgage interest rates finished the week near flat despite the up and down trading.
30 year fixed conforming loans for purchases with 25% down are at 4.375% and with 20% down are at 4.50% – both with 0 points. There are restrictions as I always outline regarding credit scores, occupancy, building types, etc. This is just an indication of where rates are in general.
Jumbo mortgages continue to be priced more aggressively than conforming loans. We are currently at 4.125% with 0 points. Again, there are restrictions.
Here is a link to most current rate sheet, but all individual borrowers need to be quoted individually after a review of their circumstances and proposed transactions.