For over a year, we have been reporting on the impact that the new regulations being created for the Qualified Mortgage (QM) and the Qualified Residential Mortgage (QRM) would have on the housing market. Last week, the Consumer Finance Financial Protection Bureau (CFPB) announced its rules for a qualified mortgage. Let’s take a look at what it will mean to housing.
Let’s Begin with ‘Simplified’ Definitions
The idea of a QM is to assure the “ability to pay” — what standards a bank must follow to make sure a borrower has the ability to make the mortgage payments before offering a loan. An over-simplified explanation would be “the things a bank can’t do”.
The idea at the center of QRM is to determine the standards that a buyer must meet before getting a mortgage. An over-simplified explanation would be “the things a buyer must do”.
What Happened Last Week?
The CFPB issued their QM rules which will be effective January 10, 2014. The rules determine the limits on the loan types which can be offered by banks, the fee structures which can be charged by banks and other such issues. (For more details, you can download the 7 page summary or the 804 page full document issued by the CFPB).
The biggest news impacting a potential mortgage applicant is that the allowable back-end-debt ratio was set at 43% which is more lenient than the discussed 36% limit. The back-end-ratio is explained by Investopedia as:
“A ratio that indicates what portion of a person’s monthly income goes toward paying debts. Total monthly debt includes expenses such as mortgage payments (made up of PITI), credit-card payments, child support and other loan payments. Lenders use this ratio in conjunction with the front-end ratio to approve mortgages.”
This will result I more buyers still being able to qualify for a mortgage.
What DID NOT Happen Last Week?
The QRM rules were NOT released. The QRM rules will be set by several different Federal agencies, such as the FDIC, Federal Reserve Board, FHFA, HUD, and OCC. These rules will be announced later this year and may include:
- A maximum “front-end” monthly debt-to-income ratio (which looks at only the consumer’s mortgage payment relative to income, but not at other debts) of 28 percent;
- A possible 20 percent down payment requirement in the case of a purchase transaction
- New minimum FICO scores established
These QRM rules will also have a big impact on future lending. We will try our best to keep you abreast of any updates.