CFPB Qualified Mortgage: Snore!
The long awaited Qualified Mortgage Rules finally came in last week and while reading them I think I fell asleep 4 times because it really was a big snore. There was no dramatic or even interesting change to note, in reality the issued rules are simply summarizing what the market place (Excluding FHA) has already done. And what is that, pray tell?
The days of the radical lending standards of the past are over. This is a positive for lenders and borrowers alike. My view has always been that lending standards aren't too tight. I have called out to those who publicly complain that standards are too tight to provide evidence that massive amounts of qualified home buyers are being shunned out of the market. To this date, nothing worthwhile has been presented to me. And as long as FHA has their core weak guidelines I don't imagine anything will.
To stay on task however, lets take a look at the core idea behind the Qualified Mortgages Rules. The idea is to focus on the ability of the borrower to repay the loan. This is my favorite core idea because I am a firm believer in the importance of debt to income when determining viability.
Below are the Ability to Repay Determinations:
1. Current or reasonably expected income or assets; income capacity and showing liquid assets to buy a home.
2. Current employment status. (The person should have a job and show stability in the same line of work for a certain length of time.
3. Monthly payment on the covered transaction.
4. Monthly payment on any simultaneous loan.
5. Monthly payment for mortgage related items.
6. Current debt obligations, alimony and child support.
7. Monthly debt-to-income ratio or residual income . ( 3-7 debt to income ratio)
8. Credit history (history or credit that prove timely payments have been made and not too much revolving credit card debt is a good thing)
All of the above determinations make good sense, and most are geared at ensuring a healthy debt to income ratio.
Further, below are additional points with which I agree and firmly believe should never be changed.
1. No interest only loans or Negative Amortizations loans. This is a plus because it eliminates any uncertainty to surprises over the long term cost of shelter for the borrower.
2. No more loans longer than 30 years. (In time, I think the 30 year loan may even be eliminated. But it is definitely a good idea to do away with any loans that are amortized for longer than that.
3. Stated incomes loans are a thing of the past. (Good riddance to bad rubbish!)
4. No loans will be done with a DTI over 43. This is my favorite item. In fact, this rule should be mandated for the FHA tomorrow.
As I said earlier, most of the core ability to repay standards are already in the market place by now. There are exceptions. Some lenders will do stated income with 30% down. And, of course, the FHA has it's reckless core lending standards for their insured loans. In fact, and I cannot stress this enough, FHA is the last lending institution that needs major overall. Once they are fixed we should be able to have greater long term confidence for this country going forward.
Frankly, I would not have fallen asleep and in fact would have been wide awake if there were more biting teeth in these standards. If the FHA had been covered in these standards I would have been cheering. However, that is a different war for another day. Meanwhile, as I said, the reality is that most of these standards are already in the market place. But while this issued guideline was not exactly riveting reading, it was a welcome final nail in the coffin of lax lending standards in this country. That is a good thing. We never want another person with no capacity to repay a loan, to be given the go ahead to buy a home, thereby bringing trouble down upon the homeowner and everyone else, again.
Logan Mohtashami is a senior loan officer in his family run Mortgage Company, AMC Lending Group, which has been providing mortgage services for California residents since 1987.