Years preceding the mortgage crisis, too many mortgages were provided to consumers without regard to one’s ability to repay the actual loan. Loose underwriting, accompanied by bad business practices, lead to one of the nation’s most serious recessions since the Great depression.
ATR/QM guidelines were implemented Friday, January 10th 2014, shaping the mortgage market for the foreseeable future. These changes attempt to tackle the above issues that crippled our economy. What does this mean to the consumer?
Ability to repay (ATR) requires lenders to make a reasonable, good faith determination that clients have the ability to repay the loan being offered. Lenders can satisfy this requirement by considering the following:
1. Current or reasonably expected income or assets
2. Employment status
3. Monthly payment on this loan
4. Monthly payment on “simultaneous loans”
5. Monthly payment for “mortgage-related obligations”
6. Current debt obligations
7. Monthly DTI ratio, or residual income
8. Credit history
The market will also be shaped around qualified mortgages. Qualified mortgages cover all closed end consumer credit transactions secured by a residential dwelling (and all occupancy types). The rule provides a presumption that creditors that originate Qualified Mortgages (QMs) have complied with the ability to repay (ATR) requirements.
QM requirements generally focus on prohibiting risky features/ practices, such as negative amortization, interest-only periods, loan terms longer than 30 years and balloon payments. In addition, all types of QMs limit points and fees. For certain qualified mortgages, debt to income ratios may not exceed 43% of a borrower’s gross monthly income.
Points and fee restrictions will be driven by loan amount:
• 3% Cap on total loan amounts > $100k
• $60k-$99,999: $3k Cap
• $20k-$59,999: 5% of total loan amount
• $12.5k-$19,999: $1k Cap
• $12,499 & below: 8% of total loan amount
Strength of legal protection for qualified mortgages is based on whether or not a loan is higher-priced. This will be determined by a loans APR. If APR exceeds average prime offer rate by 1.5% for first liens or 3.5% for second liens, such loans will be considered higher priced. Higher priced loans will carry a rebuttable presumption, while non-higher priced loans will be blanketed by a safe harbor.
Banks will still be allowed to originate non-qualified mortgages, but one can expect these loans to carry less favorable terms. Banks are rolling out such products as we speak.
It remains to be seen how many borrowers these changes will impact. Some sources say it may impact 5% of mortgages. Time will tell. What we do know is that we will be operating in a “new” lending environment.