QM? ATR? WTH?

Floating House

Despite all of the chatter around Qualified Mortgages (QM) and proving a mortgage borrower’s Ability to Repay (ATR), many local homebuyers will be UNAFFECTED by these recent Dodd-Frank changes effective January 10. Why? To begin with, all of the conforming, FHA and VA loans are given a temporary reprieve from these new provisions and are business as usual. Secondly, and frankly, these new rules are really Underwriting 101 for the most part since all fully-documented loans are underwritten to ensure that they are appropriate and affordable for the borrowers who receive them. Finally, all of the non-conforming (“jumbo”) options available today, like 40-year terms, interest-only payments, 100% financing, bridge loans, etc., will continue to be available to clients through mortgage advisors of reputable mortgage banks.

So what is a QM? In a nutshell, a QM:

• Is underwritten to ensure that a borrower has the ability to repay the mortgage
• Has a 30-year term
• Is absent of features like interest-only payments and negative amortization
• Has reasonable fees (for our area, total fees not to exceed 3% of the loan amount…)

What I find rather comical is the alleged “safe harbor” status that a QM provides to a lender, meaning that the lender can’t be sued if it issues a QM, yet the provision clearly states that a consumer can sue the lender if the consumer feels as though the lender did not properly follow the QM requirements.

One question that we’re all waiting an answer for is what the pricing impact with be on non-QM loans. While it’s certainly reasonable to presume that the rates will be slightly higher for non-QM loans, our prediction is that rates today will remain steady on non-QM loans and that QM loans will be slightly better priced in the future.

When you think about it, every loan is priced based on risk. As such, the higher the risk on a loan, the higher the price of that loan. And while QM loans may be considered as lowest risk, it’s hard to argue that a borrower who qualifies and desires a 15 year fixed mortgage is riskier than a 30 year fixed QM mortgage.

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