How QM Harms Homeowners -House Committee Hearing

Jan 14 2014, 4:14PM

The House Financial Services Committee heard testimony from five persons, almost all representing mortgage lenders, at a hearing today entitled How Prospective and Current Homeowners Will Be Harmed by the CFPB’s Qualified Mortgage Rule.  Given the title of the hearing it is not surprising that four of the five spoke out against the regulations.

Jack Hartings, President and CEO of The Peoples Bank Company and Vice Chairman of the Independent Community Bankers of America told the committee that reform of QM is a key plank of ICBA’s Regulatory Relief Agenda.

Mortgage lending by community banks represents approximately 20 percent of the national mortgage market and is often the only source of mortgage lending in the small communities they serve, he said.  The 20 percent actually understates the significance of their mortgage lending as they make a larger share of their home purchase loans to low-or moderate-income borrowers or borrowers in low- or moderate-income neighborhoods and make a larger share of home purchase loans than loans for other purposes such as refinancing or home improvement.

Hartings said there is question that the QM rule will adversely affect his own bank’s mortgage lending even though it qualifies as a small creditor making fewer than 500 mortgage loans annually and having less than $2 billion in assets.  “Even though my asset size is well below the $2 billion, in 2012 I made 493 mortgage loans.  We believe this threshold is far too low and is not consistent with the asset threshold.”   He later pointed out that such low thresholds could prevent his bank from expanding its lending as the economy recovers.

Non-QM loans will be subject to significant legal risk under the Ability to Repay (ATR) rule and the liability for violations is draconian, he said.   Non-compliance with ATR could also serve as a defense to foreclosure if the loan is deemed not to be a QM loan and small community banks do not have the legal resources to manage this degree of risk. Thus these banks, he said, will not continue to make some of the loans they have made in the past such as low dollar amount loans, balloon payment mortgages, and higher priced mortgage loans.

The full impact of ATR goes beyond QM compliance as banks must still analyze each loan for ATR compliance, a costly and time consumer procedure.  It is necessary to expect that regulators will want to see documentation of the eight ATR underwriting factors and if they are not sufficient the asset could be downgraded and subject to high capital requirements.

Without “small creditor” status, he said, his loans will be subject to a 43 percent debt-to-income limitation, a lower price trigger for “high cost” QM status which carries higher liability risk, and restrictions on balloon loans.  ICBA is urging Congress to raise the loan volume threshold. The problem could be easily addressed by disregarding loans sold into the secondary market in applying the threshold,” Hartings said.

Daniel Weickenand CEO, Orion Federal Credit Union testifying on behalf of The National Association of Federal Credit Unions said that credit unions have always been some of the most highly regulated of all financial institutions, facing restrictions on who they can serve and their ability to raise capital and the Federal Credit Union Act has strict consumer protection rules.  Despite the fact that they were not the cause of the financial crisis, they are still firmly within the regulatory reach of rules promulgated by CFPB.

The impact of this growing compliance burden is evident as the number of credit unions continues to decline, he said, dropping by more than 900 institutions since 2009.  One cause of this decline is the increasing cost and complexity of complying with the ever-increasing onslaught of regulations.  “We remain concerned about the QM standard and that this rule will potentially reduce access to credit and hamper the ability of credit unions to continue to meet their member’s needs,” he said.

A number of mortgage products sought by credit union members and offered by credit unions are non-QM loans and may disappear from the market.  He said a forty-year mortgage loan, a product sought by credit union members in high costs areas, exceeds the maximum loan term for QMs, and because of a problematic definition, a number of credit unions make mortgage loans with points and fees greater than 3% because they can leverage relationships with affiliates to get the best deal for their members.

Because a credit union will not receive any presumption of compliance with the ability-to-repay requirements for a non-QM loan, the least risk to credit unions would be to originate only QM loans.  His own credit union, Weickenand said, has decided to go that route and a recent NAFCU survey revealed that a majority of credit unions will cease or greatly reduce their offerings of non-QMs.

Weickenand said that NAFCU strongly supports bipartisan pieces of legislation in the House (H.R. 1077/ H.R. 3211) to alter the definition of “points and fees” prescribed by the QM standard and an exemption from the QM cap on points and fees: (1) affiliated title charges, (2) double counting of loan officer compensation, (3) escrow charges for taxes and insurance, (4) lender-paid compensation to a correspondent bank, credit union or mortgage brokerage firm, and (5) loan level price adjustments which is an upfront fee that the Enterprises charge to offset loan-specific risk factors such as a borrower’s credit score and the loan-to-value ratio.

Like Hartings, he supports an increase in the exemption’s asset size and 500 mortgage thresholds.  He said many credit unions are approaching one or both thresholds which will render the small lender exemption moot for them.

The Association also believes that all mortgages held in portfolio should be exempt from the QM rule not just small credit unions and would like to be able to continue to offer mortgages of 40 years or less duration as QMs.  NAFCU also supports Congress directing the CFPB to revise aspects of the ‘ability-to-repay’ rule that dictates a consumer have a total debt-to-income (DTI) ratio of 43 percent or less which will prevent otherwise healthy borrowers from obtaining mortgage loans and will have a particularly serious  impact in rural and underserved  areas where consumers  have  a limited number of options.

Bill Emerson, CEO of Quicken Loans and Vice Chairman of the Mortgage Bankers Association spoke on behalf of the trade group, starting his testimony by saying, “I can tell you categorically that Quicken Loans, like the overwhelming majority of lenders, will not lend outside the boundaries of QM. In fact, even if we wanted to, we wouldn’t be able to make non-QM loans because there is no discernible secondary market for them. The only place these loans can be kept is on a bank’s balance sheet.”

“Beyond that, the liability for originating non-QM is simply too great. Claimants can sue for actual and statutory damages, as well as a refund of their finance charges and attorney’s fees, and there is no statute of limitations in foreclosure claims. By MBA’s calculations, protracted litigation for an average loan can exceed the cost of the loan itself.

Given this uncertainty, at least for the foreseeable future he said non-QM lending is likely to be limited to three categories; loans where there are unintended mistakes, higher balance and non-traditional loans to wealthier borrowers, and loans made by a few lenders to riskier borrowers, but at significantly higher rates. He said the rate sheets he had seen suggest borrowers could pay an interest rate of 9-10 percent for non-QM loans.

Emerson said it remains very important to make adjustments to the QM rule. “The CFPB (Consumer Financial Protection Bureau) deserves enormous credit for working with all stakeholders, lenders and consumer groups alike, and fashioning a rule we think is a substantial improvement over Dodd-Frank. We are also grateful the Bureau is open to making additional revisions in the near future.”

There is a major problem with the 3 percent cap on points and fees for QM eligibility.  Because so many origination costs are fixed, a lot of smaller loans, particularly in the $100,000 to $150,000 range, will trip the 3 percent cap and fall outside the QM definition, pricing consumers, especially first-time homebuyers and families living in rural and underserved areas, out of the market.

“Additionally, the final rule picks winners and losers between affiliated and unaffiliated settlement service providers, even though their fees are subject to identical regulation. At Quicken Loans, we have chosen to affiliate with title and other service providers to ensure our customers have the best loan experience and that there are no surprises at the closing table.”  His company, he said, has won awards because its affiliated arrangements have led to a smooth closing process.

Emerson said the MBA urges the House to promptly pass H.R. 3211, the Mortgage Choice Act.

Michael D. Calhoun, President of the Center for Responsible Lending was the only one of the five presenting testimony in favor of the CFPB’s rules.  Calhoun said those rules strike the right balance of providing borrower protections while also ensuring access to credit.

The QM rule covers 95 percent of current originations according to Moody Analytics he said that this broad coverage is because CFPB established four different pathways for a mortgage to gain QM status. The first uses a 43 percent back-end debt-to-income ratio. A second is based on eligibility for purchase by Fannie Mae and Freddie Mac and a third is specifically crafted for small creditors holding loans in portfolio. Lastly, there is a pathway for balloon loans as well. This multi-faceted approach will maintain access to affordable credit for borrowers.

“This broad definition is key for borrowers, including borrowers of color who represent 70% of the net household growth through 2023.  The broad definition means that borrowers will not be boxed out of getting a home loan and will also benefit from the protections that come with a Qualified Mortgage.  In addition, several lenders have said they will originate mortgages that do not meet QM requirements, holding them in their own portfolios.  Calhoun said he expects this will only grow over time.

As a whole, these rules continue the CFPB’s approach of expanding access to credit while ensuring that loans are sustainable for the borrower, the lender and the overall economy, Calhoun said.

Also testifying was Frank Spencer, President and CEP of Habitat for Humanity’s Charlotte, North Carolina Chapter.  Spencer was primarily asking for relief from QM and ATR requirements for his organization which currently services approximately 780 mortgages.  Spencer said that despite the fact that the mortgages are non-interest bearing and that most of the chapters that originate them fall far below the thresholds of QM, some of the charity’s operations trigger the requirements and present significant liability for its officers and community partners.

Gift-funded Down Payments for Mortgage

by Ted Rood

New FHA Alternative Boosts Low Down-Payment Options

Jan 3 2014, 3:54PM

As Fannie Mae and Freddie Mac eliminated their 100% and 97% purchase loans following the housing meltdown, FHA financing once again became a preferred low down payment option. FHA loans offer a minimum 3.5% down payment, which can be gifted from a close family member. Thus, buyers whose sales contracts specify seller paid closing costs and who use the gift down payment, can often purchase a home with minimal out of pocket expenses.

FHA allows borrowers with credit scores as low as 580 to put just 3.5% down (those with lower scores face increased down payment requirements), and routinely approves higher debt loads than Fannie Mae or Freddie Mac. The combination of marginal credit scores and low (or no) buyer financial investment contributed to FHA’s default rates as the housing market crashed. As a result, FHA has raised MI significantly and has long since eliminated seller-paid down payment assistance programs.

Fannie Mae also allows down payment funds to be gifts from close family members for single family principal residences, with down payments as low as 5% for qualified borrowers. Until recently, however, private mortgage insurance (required for loans exceeding 80% of sales price) vendors required buyers to contribute at least 2% of their own funds in a transaction in addition to any gift funds. PMI provider United Guaranty recently altered their guidelines and now allow down payments to be exclusively gifts, a move likely soon adopted by competitors. The announcement gives eligible buyers a distinct advantage over FHA’s considerable MIP costs.

FHA’s upfront MIP fees are now 1.75% of the loan size added to the loan balance ($1750 on a $100,000 loan, 3.5% down), with an additional monthly charge of $108.33, which applies for the life of the loan. Conventional PMI costs vary slightly, but have NO upfront fee. United Guaranty’s pricing engine returned a price quote of $64.17/mn for a 720 score, 5% down borrower, a substantial savings of $4,399 over just the loan’s first 5 years compared with FHA’s fees.

The more conservative underwriting guidelines for Fannie Mae gift-funded down payments aim to ensure only qualified applicants receive these loans. Credit scores of 720 or higher (versus minimum scores of 620 for loans without gifts) are required. Debt ratios are limited to a 41% of applicants’ gross income, an even stricter restriction than non-gifted loans. The home must be a primary residence for all those on the loan, and no second mortgages, balloon notes, or temporary interest rate buy downs are allowed. The credit score, debt ratio, and other limitations set Fannie’s 5% down program apart from FHA’s less stringent standards and should result in far fewer defaults.

It is important to note, however, that many lenders have restrictions on gift funds, despite Fannie Mae’s acceptance. Shopping for this program may be challenging. Here’s a few steps to start the process: if you have a preferred lender, call and ask whether they offer this program; if you need a lender, contact a loan officer in your area. You might have to shop around to find a lender offering the program with no overlays.

About the Author

Ted Rood

Senior Mortgage Planner NMLS 543290, Wintrust Mortgage