How to Stymie Mortgage Lending: QM Rule Edition

For lenders and servicers, the qualified mortgage rule, recently unveiled by the Consumer Financial Protection Bureau, is the Holy Grail.

This status was achieved because, under the new rule, QM loans will carry a safe harbor provision and provide a degree of insulation against future lawsuits versus a rebuttable presumption, which does not. I feel the CFPB gave everyone something to cheer about, but ultimately was too obtuse and tilted the lending scale in favor of Fannie Mae, Freddie Mac and the Federal Housing Administration. What the industry wanted was a clear-cut rule and what it received was 800-plus pages of confusion.

Among my concerns:

The 43% debt-to-income ratio is now the maximum for a QM loan. Loans written to Fannie Mae, Freddie Mac, FHA, Rural Housing and the U.S. Department of Veterans Affairs will automatically get QM status. The DTI is a poor indicator of how a loan will perform. Furthermore, it gives the government-sponsored entities another edge in lending, with the taxpayers picking up the tab. A more realistic way to judge people's ability to pay is to use their residual income, a method the VA already relies on. 

Fees and points are now capped at 3% of the loan amount and may include some appraisal fees and mortgage insurance fees. While further information is sought by the CFPB, government-backed guarantees or insurance fees will not be included in the cap. What I found interesting is the double-counting method of adding up loan officer compensation for the 3% calculation. As written, it will take into account all monies received from consumers and secondary market participants. This will include income derived from lenders that send their loans to title companies in which they have ownership interests. I am curious to see if the large lenders that own appraisal management companies, real estate firms that own mortgage companies and so on will also have to account for the "referral" income when calculating the 3%.

Jumbo loans will suffer because, in many cases, they can easily exceed the new threshold despite having other factors which make them good risks. Negative amortization loans were very popular with the jumbo mortgage market. I personally had one and thought it was a great tool. They are now banned. Ultimately, smaller loans will become less attractive to write as lenders find it uneconomical.  

Here is the hypocrisy with this cap rule: The CFPB is not concerned when real estate companies charge a 6% fee (or more) on the total real estate transaction, but seems unduly concerned about what adds up to 3% of the amount financed by the a lender.

What the mortgage industry needs is clear, better lobbyists.  

Additionally, the rule basically sounds the death knell for the subprime mortgage market. Unfortunately, during the past five years many consumers' credit ratings took a beating. During the last decade, the main problem with subprime lending was that it did not correctly price risk. It offered borrowers no-to-low down payments and featured no income verification, fueling huge premiums to originators. If housing is going to recover, we need to have all lending options on the table. Subprime mortgages should be permitted, but underwritten with common-sense guidelines, such as low loan-to-values, verified income / assets and counseling.  

The CFPB is endowed with a broad mandate and sweeping powers. It is putting in place guardrails for mortgage lending and has one chance to get it right. However, this will not be accomplished by unclear and vague rules, enabling certain segments of the housing industry to have exemptions and banning certain financing products. A better approach would be to educate consumers and let them make prudent financing decisions for themselves.

I, unlike, many of my colleagues do not see the CFPB as the enemy.  I see this new agency, and their objectives defined by Dodd-Frank, as an opportunity to improve lending and get the housing market moving.  

On the same token, the CFPB should not view the private mortgage industry as a bunch of rogue Mr. Potters. One of the main goals of the CFPB is to make lending more even and transparent. Every industry participant should champion this endeavor. The CFPB must do the same in their rule-making.

Richard Booth is a certified mortgage banker and industry consultant located in Neptune, N.J. He can be reached at richard@richardboothcmb.com.