Unemployment rate tumbles; CFPB tinkers with QM mortgages
I’ve been holding off on posting the blog this morning and I’m glad I did. The unemployment numbers just came out and the WSJ is reporting that:
“Americans gained jobs at the fastest pace in more than two years last month and the jobless rate plunged, a sign the economy has rebounded from a winter rut.
Nonfarm employment grew a seasonally adjusted 288,000 last month, the Labor Department said Friday. That marked the best month of job creation since January 2012 and the second-best month since the economy emerged from recession in mid-2009.”
In talking to credit unions this week all of them were hit hard by winter weather that literally put a freeze on lending as people stayed by their fireplaces and put off purchases like new cars. Hopefully these numbers indicate that the economy really is gaining steam and that employers are confident enough to start adding jobs. I’m still not convinced but time will tell.
Now back to my regularly scheduled blog….
The Bureau that never sleeps came out with a proposal earlier this week that makes a narrow but important change to QM mortgages. As any credit union providing mortgages or that reads this blog should know one of the key requirements for a mortgage to qualify as a so-called “qualified mortgage” is that points and fees not exceed certain thresholds. This means that for mortgages of $100,000 or greater total points and fees cannot exceed 3% of the total loan amount. (Remember that the thresholds are different for smaller mortgages.)
So what happens when a lender realizes after a loan has been consummated that a miscalculation of points and fees was made and that a borrower was charged too much for a loan to qualify as a QM?
Under the existing regulation there is no remedy for this oversight, meaning that institutions dependent on selling mortgages to the secondary market might find themselves stuck with a mortgage they don’t want if only because their credit line is only so big. In addition the lender doesn’t get the legal protections that come with making a QM mortgage. According to the CFPB, some lenders are so determined to stay within the points and fees limitations that they have even put it in a buffer lower than required by the CFPB to ensure that their mortgages are qualified mortgages.
In response to this anecdotal evidence, as well as recognition that good faith mistakes can be made the Bureau proposed regulations earlier this week to create a good-faith exception for lenders who spot a miscalculation of points and fees within 120 days of consummation and reimburse a borrower for any excess charges. This good-faith exception would be applicable only where lenders have a policy and procedure in place for post-closing review of their mortgages so that mistakes can be quickly identified.
Now for those of you looking for a higher points and fee cap the proposal doesn’t go far enough but I personally think is the type of intelligent modification that makes it so hard to criticize the CFPB too much. For one thing, a policy of post- closing review is a phenomenal way of correcting errors and putting processes in place to make sure they don’t happen again. You should never make the same mistake twice, make new ones instead.
In addition, front-end analysis of consummated mortgages is the direction the industry is moving in. One of the real troubling consequences of the Great Recession has been that lenders often find themselves responsible for taking back loans that they made and sold several years ago because of a foreclosure. The contracts you enter into with the GSE’s and other secondary market purchasers are so one-sided that any mistake in the closing process can make you responsible for a foreclosed mortgage even if the errors had nothing to do with the mortgage going bad.
As it stands right now, the good-faith exception being proposed by the CFPB is extremely narrow. It would only apply to mistakes in calculating points and fees, so, for example, if you miscalculated someone’s debt- to- income ratio and it actually exceeds a 43 percent debt- to- income ratio cap you would still be out of luck unless Fannie or Freddie is willing to purchase the loan. But the CFPB indicated in the preamble to this proposal that it would consider expanding the good-faith exception if regulations can be designed to deter intentional mistakes and loans can be restructured to conform to QM requirements. Here is a link to the proposal. http://files.consumerfinance.gov/f/201404_cfpb_tila_proposed-amendments.pdf
For those of you still awake have a nice weekend.