When It Comes To Qualified Mortgages, Take A Deep Breath

May 21, 2013 at 7:28 am Leave a comment

Last week, NAFCU released the results of a survey indicating that 88% of respondents will reduce or discontinue originating mortgage products that don’t conform to the CFPB’s definition of a qualified mortgage.  Considering that slightly more than 37% of respondents reported underwriting mortgages that would not meet QM criteria in 2012, this is potentially big news and I just hope it is based on an objective assessment of the impact that the regulations will have on lending practices and not on a misconception about what the law requires.

So before you jump on the QM bandwagon, keep these points in mind.  First, a QM is granted the highest form of legal protection regulators can give it, but it is a specific type of mortgage.  In contrast, the CFPB wants all mortgages to be subject to an ability to repay analysis.  This is the true baseline criteria and for the vast majority of credit unions, it is a requirement that they already meet.  For example, how often do you not assess an applicant’s ability to repay a mortgage before you give them one?  Do you make liar loans?  Or do you actually request documentation that the person you are thinking of lending tens of thousands of dollars to actually has a job?  This is just one example of the type of criteria which Congress and the CFPB justifiably felt compelled to mandate as a result of the non-existent underwriting standards that triggered the Great Recession.

Here’s another question for you.  How many of your mortgages go into foreclosure and, of those, are you confident that your staff and lawyers understand the foreclosure process well enough to defend these foreclosures in court?  The most practical benefit of a QM mortgage is that it provides a safe harbor against a homeowner’s claim that a foreclosure action should not go forward because proper underwriting standards and legal procedures were not followed.  If you know this isn’t true, then why deny making the loan to the vast majority of members who may not qualify for QM loans but whom you are confident will repay their mortgage obligations?  In any event, given the atrocious length of time it takes to foreclose in New York State, this should be a last resort anyway.

One more question to ask yourself.  Do you reserve the right to hold mortgages that don’t meet secondary market standards?  Of course you do.  Now’s not the time to stop.  The reality is that the importance of Fannie Mae and Freddie Mac to credit union mortgage underwriting will diminish in coming years.  Those credit unions that want to engage in mortgage lending are going to have to hold more mortgages.  Does this mean that smaller credit unions will be put at a further disadvantage with regard to mortgage lending?  You bet it does.  But this has nothing to do with the decision of individual credit unions as to whether or not they should take on QM mortgages.

In addition, keep in mind that Fannie and Freddie are adopting some, but not all, of the QM criteria.  Most importantly, they are reserving for themselves the right to establish their own debt to income ratios.

The Association’s Director of Compliance, Michael Carter, and I have come to realize that your stance on the impact that these regulations will ultimately have on credit union lending reflects whether you are listening to the underwriters or the lawyers in getting ready for the new mortgage regime.  Underwriters understand that many mortgages that don’t meet QM criteria will do just fine because a member has the ability to repay the loan.  Lawyers are paid to be paranoid, and ultimately the secondary market is going to want loans that meet the higher standards of legal protection.  Both sides have a point and each credit union will be well advised to look at its own unique situation and adopt the approach that best fits its comfort level and commitment to its members.  Don’t assume that a QM is the only type of mortgage you should be offering.

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

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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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