On Jan. 10, the Consumer Financial Protection Bureau (CFPB) rolled out new rules governing how mortgage lenders originate loans. The regulations are designed to prevent shady or predatory lending and otherwise protect consumers. Financial institutions have been preparing for the changes for months. The big fear is that potential homebuyers will be blindsided.
What do ATR and QM mean?
The two keywords from the new rules are “ability to repay” (ATR) and “qualified mortgage” (QM).
- The ATR provision requires lenders to gather extensive documentation to assure that borrowers will be able to keep up with their mortgage payments.
- One provision caps total points & fees at 3 percent for loans of $100,000 or more.
- A more controversial part requires that the mortgage payment, including taxes and fees, plus credit card and other loan payments not exceed 43 percent of a borrower’s gross monthly income.
Lenders don’t have to adhere to the 43 percent debt-to-income ratio, but if they don’t they probably won’t be able to sell the loan to Fannie Mae or Freddie Mac – unless they meet very specific criteria.
Qualified mortgages are a new standard that excludes certain mortgages types — interest-only, adjustable-rate, balloon loans, and negative-amortization mortgages, for example — that helped prompt the housing crisis.
ATR and QM: The Goals and Possible Outcome
Most people agree with the goals of the new rules — safer loans and fewer defaults — and in fact, mortgage lenders insist they’ve already adopted many of them voluntarily. “Mortgage lenders have no appetite for loans that may go bad, the consequences are too far reaching, and the sins of the past are still warm and steamy,” says Mark Greene at Forbes.com.
But the devil is in the details, and details can bring unintended consequences.
- One outcome is almost certainly a decrease in new loans in the first part of 2014. The self-employed and low-income borrowers are the most likely to be challenged by the new rules.
- Real estate attorney Shari Olefson estimates that “about 20 percent of people who have mortgages right now, will not be able to get qualified mortgages.”
To ensure everyone is on the same page when it comes to financing, set the right expectations at the beginning by having them consult with a mortgage professional as early in the home buying process as possible.