How the 2014 Mortgage Rules Impact You

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Imagine that you’re playing a game where the rules constantly change, and everybody is always confused about them  (including the rule makers).  Welcome to the 2014 mortgage industry!  Here’s the inside scoop: federal regulators came out with “final” mortgage rules in January 2013.  They gave the mortgage industry a full one year to comply.  Then, the regulators literally changed the rules 4 times since then.  The latest changes came out in November, 2013… just two months before the deadline for compliance.

We asked the regulators for a final, final, final version of the rule so that we could read it in its entirety without getting confused by all the different versions.  Their staff-lawyers replied, “Good idea!  We don’t have a final, final, final version of this created yet, but if you figure it out, please send us a copy!”  This is NOT a joke.  No wonder why everyone is so confused…  So here’s what we did: we broke down the new rules into three areas that impact your business as a real estate professional.

#1 – The QM and ATR Rule: Three Buckets

The US government has written some mortgage underwriting guidelines into federal law in order to make sure that borrowers have the “ability to repay” their mortgages.  These guidelines are collectively known as the Ability-to-Repay (ATR) and the Qualified Mortgage (QM) Rules.  Generally, mortgage companies are now only allowed to originate mortgages that fit into one of three buckets:

	Bucket #1: Fannie Mae, Freddie Mac, FHA, VA, or RHS “Qualified Mortgages”	Bucket#2: Non-Agency and Non-Government “Qualified Mortgages”	Bucket #3: “Non-Qualified Mortgages”
Examples	Most Agency or Government Loans (including ARMs)	Loans that have unique features like balloons or pre-payment penalties	Loans that have higher APRs or don’t otherwise meet the criteria in the previous two columns
Maximum Debt-to-Income (DTI) Ratio	Flexible, based on whatever Fannie, Freddie, FHA, VA or RHS guidelines are at any given moment	43%	Flexible, based on each bank or mortgage company’s criteria
Lender’s Legal Liability	Lenders Have a “Safe Harbor” When Making Most of These Types of Loans	Lenders Have a “Safe Harbor” When Making Most of These Types of Loans	Lenders Open Themselves Up to a Little More Legal Liability When Making These Types of Loans

#2 – The QM and ATR Rule: DTI and APR Requirements

As you can see from the chart above, the one major difference between the new ATR rules and the lending guidelines as they currently stand, is that non-agency and non-government loans have a maximum 43% debt ratio. It’s possible that Fannie Mae, Freddie Mac, the FHA, the VA and the USDA/RHS may lower their maximum debt ratios in the future. However, most of these groups have come out recently and said that no change in maximum DTI (from current requirements) is imminent. Even so, it’s probably a good idea for you and your mortgage professional to help borrowers lower their DTI and their APR.  Here’s how:

• Consider a different down payment scenario
  • Less of a down payment in order to use the funds to pay off other debt and lower the overall DTI; or,
  • More of a down payment to lower the mortgage payment
• Consider seller-paid points to reduce the borrower’s monthly payment and/or the APR on the borrower’s mortgage. Added bonus with this strategy: seller-paid points are NOT required to be included in the borrower’s APR. Loans with a lower APR are more likely to fall under the coveted “qualified mortgage” category (buckets #1 or #2)!

Either way, borrowers should seriously evaluate these options with a Certified Mortgage Planning Specialist (CMPS®) who is skilled in this area.  Remember, a lot of lenders will be scrambling to fit their loans into one of the two “qualified mortgage” buckets. It’s much better for you to work with a mortgage professional who is skilled in helping borrowers reduce their DTI and their APR using some of these strategies.

#3 – The New Appraisal Rules Under the Equal Credit Opportunity Act (ECOA)

The new appraisal rules require mortgage lenders to provide a copy of the appraisal to the borrower three (3) business days prior to closing.  However, borrowers can waive this requirement if they sign a waiver 3 business days before closing.  Either way, this could be a problem for you if the mortgage company doesn’t get the appraisal or waiver to the borrower in a timely fashion.  Be sure to check with your mortgage professional to determine his/her policy in this area in order to make sure that your closings don’t get delayed over this issue.

Please feel free to contact me for further information on any of these topics!

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Scott Shenton
NMLS Number: 1039731
Apex Home Loans
Corporate NMLS Number: 2884
sshenton@apexhomeloans.com
https://www.apexhomeloans.com/scottshenton
(240) 268-3156
3204 Tower Oaks Blvd, Suite 400,
Rockville, Maryland 20852

   

NMLS #2884 (www.nmlsconsumeraccess.org): Licensed as a Mortgage Lender and Broker by the Virginia State Corporation Commission, License #MC1278; Licensed in the District of Columbia as a Mortgage Lender and Broker by the DC DISB License # MLB2884; Licensed in Maryland as a Mortgage Lender and Broker by the DLLR, License #06-4989; Licensed in Delaware as a Mortgage Lender and Broker by the Office of the State Bank Commissioner, License # 011603.