After months of speculation, on Jan. 10, the Consumer Financial Protection Bureau (CFPB) finally announced its qualified mortgage standards, which are the new, defining lending guidelines for the nation’s banks.
Designed to avoid any of the exotic, risky mortgages that crippled the housing market in 2008, the qualified mortgage standards are based upon a simple set of rules that a mortgage must follow in order to be deemed “qualified” by the government, and based on the CFPB’s announcement, it seems that those standards are both reasonable and straightforward.
Though there had been fear among housing advocates and real estate professionals that the qualified mortgage standards would restrict lending – especially through a rumored measure that would mandate a 20 percent down payment for all qualified mortgages – the actual standards announced by the CFPB aim for responsibility and documentation, all meant to ensure the borrower’s ability to repay his or her loan.
So with that in mind, here are the standards that banks must consider when making a loan, in order to meet qualified mortgage standards:
- Current or reasonably expected income or assets
- Current employment status
- The monthly payment on the covered transaction
- The monthly payment on any simultaneous loan
- The monthly payment for mortgage-related obligations
- Current debt obligations, alimony and child support
- The monthly debt-to-income ratio or residual income
- Credit history
These measures went into effect Jan. 21, but lenders will be given until Jan. 10, 2014 to fully implement them. Additionally, on Jan. 17 the CFPB unveiled new regulations for mortgage servicers, which, among other things, restricted dual-tracking and required servicers to maintain greater communication with borrowers, particularly in offering delinquent borrowers with loss mitigation options and notices of when modification applications are incomplete.
The qualified mortgage standards, the CFPB explained, are primarily designed with legal liability in mind; so if a bank makes a loan without those standards in mind, and the loan results in a foreclosure, bankruptcy, what have you, it could be liable for damages; but on the flip-side, if the bank did use qualified mortgage standards when making the loan, and ill fortune befalls the borrower, the bank would have greater legal protection.
Other important things to consider about the qualified mortgage standards include: interest-only loans, which also bore the wonderfully wonky name “negative-amortization loans,” are no longer valid, and banks can no longer use teaser rates either; debt-to-income ratios have been adjusted, from 50 percent to 43 percent; and finally, the CFPB’s ability-to-repay rule applies to jumbo loans, and although jumbo loans are by nature not guaranteed by Fannie Mae or Freddie Mac, analysts still expect the standards to prevail.