Regulator Ends Debt Ratio Standard for Mortgage Approvals – Orange County Register
From the earliest days of mortgage approval standards, you had to do the math first and foremost.
Did your total home payment and recurring monthly bills divided by your total monthly income stay at or below a specific debt-to-income ratio, or DTI?
If your numbers were verified, you were one step closer to loan approval and home ownership. Otherwise, no home for you.
In response to the mortgage crisis of 2007-2010, when spurious standards reigned, the Consumer Financial Protection Bureau (actually the mortgage policy) switched to a universal, regulated underwriting standard called Qualified Mortgage, or QM.
It required lenders to make reasonable, good faith decisions based on verified documents that the borrower had the capacity to pay off that mortgage.
The big new line in the sand for lenders was a maximum debt-to-income ratio of 43% for all loans except Fannie, Freddie, FHA, and VA.
Lenders who do not comply could be held liable to consumers for damages, including full loan cancellation. The CFPB did not want lenders to provide loans to unqualified borrowers. Lenders paid a high price if they did.
But on December 10, the CFPB published a new general quality management final rule removing the 43% cap.
Under the new rule, creditors must take into account the consumer’s DTI ratio, residual income or assets other than home value and debts. Creditors can mix and match underwriting rules from Fannie, Freddie, FHA, or VA.
In fact, lenders can do just about anything as long as they document what they are doing, have written policies, and are prepared to defend their repayment capacity. Fannie and Freddie loans are still exempt.
Most importantly, the office’s new litmus test is price. A mortgage is QM Safe Harbor if it is a first lien with an annual percentage rate that does not exceed the Average Prime Rate, or APOR, by more than 150 basis points. APOR is a weekly estimate based on a survey of average APR.
For example, on December 7, the PPA for a 30-year fixed rate was 2.76%. If the APR on your loan does not exceed 4.26% (2.76% plus 150 basis points), your loan will be considered a QM safe haven loan.
A second category allows the RPA to be 225 basis points above the RPA, but with a rebuttable safe harbor presumption.
We also now have a seasoned QM final rule. This largely follows the same repayment capacity rule, but it is designed for riskier and more expensive mortgages (what we currently call unqualified or exotic mortgages) that do not meet the general limits of QM APR.
To achieve safe haven status, the Seasoned QM Loan cannot have more than two 30-day late mortgage payments in the first 36 months.
This new rule emphasizes a more holistic approach to mortgage lending, especially for underserved and low-income borrowers. For example, small community banks that know their customers and their habits can make prudent decisions without being held back by excessive ratios.
Roger Fendelman, partner at Garris Horn LLP law firm, noted that the old rule prevented recent immigrants without established credit from getting a mortgage.
“If you want to try your luck with people, you can do it,” he said.
These new rules are good for consumers and lenders.
“Consumer protection remains in place,” said Guy Cecala, CEO and editor of Inside Mortgage Finance. “The CFPB had failed to achieve (its original 43% DTI rule) had such a deterrent effect on non-QM loans.
Since the original rule, only about 2% of all mortgages were non-QM, according to Cecala.
What does this mean for jumbo loan borrowers, or those who borrow over $ 822,375 in Los Angeles and Orange counties and over $ 548,250 in the Inland Empire?
“That’s good,” said Dave Stevens, retired CEO of the Mortgage Bankers Association. “It was ridiculous for richer borrowers with higher incomes (capped at 43%).”
And the risk?
To my surprise, criticism of these new rules came from a 40-year industry veteran who has worked in the exotic mortgage business.
“There’s always a higher natural risk when you go for higher DTIs,” said Joe Lydon, co-founder and managing director of LendSure, a non-QM, San Diego-based mortgage lender. “The rise in house prices due to COVID masks the imperfections. Go back to 2005. As soon as business started to increase, delinquencies increased.
(Full disclosure: My company, Mortgage Grader, is a customer of LendSure.)
Lenders can start using the general MQ final rule now. The Seasoned Quality Management Final Rule and the Final Quality Management General Rule will come into effect 60 days after publication in the Federal Register.
Freddie Mac Rate News: The 30-year rate averaged 2.67%, the 15th lowest and 4 basis points lower than last week. The 15-year fixed rate averaged 2.21%, also a record low and down 5 basis points from last week.
The Mortgage Bankers Association reported a 1.1% increase in loan application volume from the previous week.
At the end of the line : Assuming a borrower gets the 30-year average fixed rate on a compliant loan of $ 548,250, last year’s payment was $ 318 more than this week’s payment of $ 2,215.
What I see: Locally, well-qualified borrowers can obtain the following fixed rate mortgages with a cost of one point: a 30-year FHA at 2.25%, a 15-year conventional at 1.99%, a 30-year conventional at 2.375%, a 15- a conventional high balance over one year ($ 548,251 to $ 822,375) at 1.99%, a conventional high balance over 30 years at 2.5% and a jumbo over 30 years at 2, 75%.
Eye-catcher loan of the week: A high 30-year balance set at 2.75% free of charge.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected] Its website is www.mortgagegrader.com.