How Big A Deal Is FHFA’s Qualified Mortgage Announcement?

May 7, 2013 at 7:59 am 4 comments

imagesCAN9GZPJYesterday’s announcement by the FHFA that, effective January 2014, it will only accept mortgages that comply with certain qualified mortgage criteria is actually not as big a deal as it sounds for those of you who sell your mortgages to Fannie or Freddie.  Still, it does demonstrate why credit unions should be preparing now for huge adjustments in the mortgage industry.

First, a quick reminder.  Under Dodd-Frank and its regulations, lenders must document the criteria they used in determining that a potential homebuyer has the ability to repay a mortgage loan.  In addition, mortgages that meet specific criteria mandated by the regulations will be classified as qualified mortgages, which are granted a safe harbor against legal claims and defenses that a borrower never should have been given a mortgage in the first place.  For a phase in period of up to seven years, mortgages purchased by government entities including Fannie and Freddie will also be considered qualified mortgages.

According to its press release, beginning on January 10 of next year, Fannie and Freddie will not purchase a loan subject to the ability to repay requirements if the loan is not fully amortizing, has a term longer than 30 years, or includes points and fees in excess of 3% of the total loan amount or “such other limits for low-balance loans as set forth in the rule.”

I quoted that last part because the points and fees provision is potentially the most problematic for credit unions.  Since charges such as origination fees will now be included in the calculation of points, credit unions could find themselves up against the three percent cap more often than they expect.  However, the regulations promulgated by the CFPB make exceptions for small loans and exclude so-called bona fide points and fees, which are very generally fees retained by a third-party over which the originator exercises no control or has no affiliated relationship.  You should take the time to review the points and fees section-by-section analysis in Section 1026.32(b)(1) to get a sense of exactly how much this may impact your mortgage lending.

The crucial thing to keep in mind is that Fannie and Freddie are retaining the right to accept mortgages that exceed a 43% debt-to-income ratio.  If it were going to strictly comply with CFPB’s definition of a qualified mortgage they would no longer accept such mortgages.  Since the regulations provide that a mortgage purchased by Fannie and Freddie automatically qualifies as a qualified mortgage this means that for the next seven years or until we decide what to do with Fannie and Freddie, whichever comes first, credit unions will not have to worry about the DTI restrictions so long as their mortgages meet Fannie and Freddie underwriting standards.

Does all this mean that FHFA’s announcement is nothing to be concerned about?  While the operational impact may actually be minimal for many credit unions, the policy implications are not.  I was reviewing the qualified mortgage preamble this morning and I was struck by the almost pleading tone with which CFPB encourages institutions to continue to make mortgages that don’t qualify for qualified mortgage protection.  The CFPB correctly argues that there are many qualified borrowers for whom banks and credit unions can document an ability to repay a loan even if they don’t meet qualified mortgage standards.  The danger is that if the qualified mortgage standard becomes the de facto standard for getting a mortgage in this country, then the CFPB’s worst fear, that these regulations will result in consumers who are more informed of their mortgage rights but less able to get a mortgage, could come true.  By the way, consumer groups argue that this scenario is far-fetched, but the Federal Reserve’s recently released survey of lending standards demonstrates that banks are still reluctant to lend to all but the best applicants.  Right now we can write that off as a reflection of the economy, but as these new regulations take hold, let’s hope that the sluggish economy isn’t hampered by well-meaning regulations that miss the mark.

Have a pleasant day.

Entry filed under: Compliance, Economy, Regulatory. Tags: , , , , .

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4 Comments Add your own

  • 1. Robert Padula  |  May 8, 2013 at 3:25 pm

    Great Blog Henry! I love the last paragraph. I’m very concerned about the 3% limitation. We charge a flat $500 origination fee regardless of the mortgage amount, that would be included in the 3% limit. If a member decides to purchase 2 discount points for a lower interest rate, will that have to be included in the 3% limit? Also, do Loan Level Pricing Adjustments charged by Fannie Mae have to be included towards the 3% limit? For example, on a $80,000 30 year loan at 95% LTV for a 670 credit score the LLPA would be 2.25%, with our $500 origination fee we will be getting very close to 3%. Are there other fees in addition to the origination fee that have to be included towards the limitation such as Processing Fee, Underwriting Fee, etc?

    Reply
    • 2. Henry Meier  |  May 9, 2013 at 1:15 pm

      3. Yes there are many fees that have to be included in the calculation of points and fees in addition to points and fees other than the origination fee. There are too many to list out for the blog but go to 1026.32(b)(1) of the final regulations.

      One other point to keep in mind is that the 3% threshold applies to mortgages of $100,000 or greater. Otherwise points and fees are adjusted based on the following thresholds

      For a loan amount greater than or equal to $60,000 (indexed for inflation) but less than $100,000 (indexed for inflation): $3,000 (indexed for inflation);
      (C) For a loan amount greater than or equal to $20,000 (indexed for inflation) but less than $60,000 (indexed for inflation): 5 percent of the total loan amount;
      (D) For a loan amount greater than or equal to $12,500 (indexed for inflation) but less than $20,000 (indexed for inflation): $1,000 (indexed for inflation);
      (E) For a loan amount less than $12,500 (indexed for inflation): 8 percent of the total loan amount

      Reply
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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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