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Mortgage Standards Are Going to Get Much Tougher in 2014

by Peter Thomas Ricci

Qualified mortgage standards are back in the news, with the FHFA announcing that it is on track to adopt the standards’ “ability to repay” provisions.

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The Federal Housing Finance Agency’s (FHFA) has announced that beginning Jan. 10, 2014, Fannie Mae and Freddie Mac, the two massive government-sponsored enterprises it regulates, will only guarantee loans that meet the government’s qualified mortgage standards.

The Consumer Financial Protection Bureau made a huge splash earlier this year when it announced, after much anticipation, its qualified mortgage (QM) standards, but news quickly died down regarding what kind of impact the measures would have on the U.S. housing market. Now, though, the FHFA’s announcement has thrust the mortgage regulations back into the spotlight, and many are wondering what this means for residential loans come 2014.

What Fannie and Freddie Will NOT Guarantee

The FHFA was fairly specific on what kinds of loans Fannie and Freddie will not guarantee. Once the QM standards go into effect next year, the following mortgages will be off limits:

  • Mortgages with terms longer than 30 years.
  • Mortgages that includes points and fees that exceed 3 percent of the total loan amount.
  • Mortgages with debt-to-income ratios of greater than 43 percent.
  • Mortgages that are not fully amortizing, and thus violate the QM’s ability-to-repay rule.

And in case you need it, here’s a quick refresher on all the consumer variables that banks must scrutinize under QM’s ability-to-repay rule:

  • 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

If it appears that a bank has not adequately considered those details, Fannie or Freddie could refuse to guarantee the mortgage.

So Much for Mortgage Waivers?

As HousingWire pointed out, the FHFA’s announcement is a decided contradiction of earlier reports regarding its implementation of the QM standards. Previously, news outlets had indicated that the FHFA would be granted temporary waivers from the most stringent of QM’s standards (for up to seven years, in fact), so analysts and real estate professionals alike had stopped pressing the panic buttons on how detrimental QM would be to the housing recovery.

And there were certainly alarming reports that followed the CFPB’s detailing of QM. The most notable, by CoreLogic, found that 52 percent of today’s mortgage originations would not meet QM standards, with the 43 percent debt-to-income ratio ceiling alone eliminating 24 percent of today’s loans. In its report, though, CoreLogic made specific mention of those temporary waivers, so its analysis was not one of alarm.

With its new announcement, though, the FHFA said it plans to use the tight standards of QM to lessen Fannie and Freddie’s overwhelming presence in the mortgage markets; indeed, along with the FHA, the GSEs guarantee 90 percent of all new loans, but the adoption of the QM standards will most definitely lower that number.

“Adoption of these new limitations by Fannie Mae and Freddie Mac is in keeping with FHFA’s goal of gradually contracting their market footprint and protecting borrowers and taxpayers,” the FHFA concluded.

So what does all this mean? Jan 10., 2014 is still some time away, but it’s safe to say that mortgage standards for GSE-guaranteed loans will become much tougher when that date appears – and that private lenders will need to return to the lending arena to compensate.

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