What Are QM: Qualified Mortgages? Who really knows?
QM: Qualified Mortgages, took effect on January 10, 2014. In essence QM: Qualified Mortgages is trying to create a standard mortgage guideline under the guise of protecting consumers; but QM: Qualified Mortgages is really meant to protect the GSE’s or Fannie Mae and Freddie Mac, and those loans insured by the Federal Housing Administration ( FHA ), Department of Veteran Affairs (VA), and USDA from frivolous litigation such as class action law suits, and actions brought against by individual states attorney needing publicity. While some of the litigation has its merit and real damage has been done to the public, most such legal actions are self-serving either aimed at advancing political or financial interests.
Understanding Quality Mortgages
Ultimately the Quality Mortgage policy is good in that lenders are going to have to be afforded some protections. What the abundance of frivolous litigation caused is lenders and banks to tighten up to a point of virtually not lending at all. This basically impeded the housing recovery after the mortgage meltdown for years.
Qualifying Under Qualified Mortgages
In order to be a QM Mortgage the borrower’s total debt ratio inclusive of a propose mortgage must be under 43% of their total gross income.
However, if Fannie Mae’s or Freddie Mac’s automated underwriting system(s) DU/DO or LP approve a borrower this debt ratio calculation can be thrown out the window. Mortgage loan borrowers can be approved with debt to income ratios well into 50% or more of their total combined income.
A loan would also be a QM Safe Harbor loan if the loan is manually underwritten and meets the GSE’s underwriting standards or FANNIE, FREDDIE, or FHA, VA, and USDA insurance requirements.
Fannie, Freddie, FHA, VA, and USDA do not have to come up with their actual QM requirements or standards until January 10, 2021 as long as they are under the thumb of the FHFA or whichever occurs first.
Fannie Mae, Freddie Mac, FHA, VA, USDA
In a nut shell, Fannie, Freddie, FHA, VA, and the USDA can pretty much do whatever they want whenever they want. I guess it’s good. We need liquidity in the market. This gives them the freedom, and a lot of it, to adjust lending parameters as the go. It is also affords them as much or more potential to abuse the secondary markets for volume and profit when needed. I am in the lending industry, and where you stand most of the time depends on where you sit. So I guess I am for it.
Guidelines Of Qualified Mortgages
QM Mortgages have certain guidelines that must be followed. We just talked about the debt ratio guideline. It’s pretty loose.
The fee restrictions built into QM often hurt more clients than they help. All loan fees associated with a mortgage point and fee calculation must be under 3% of the loan amount. The sounds reasonable when a congressman is looking at it, but it practice it is very cost prohibitive and causes many a lender to overlook loan amounts under a $150,000. In states where attorney pull down title is even more restrictive in the loan closing fee is considered a point and fee calculation. It is often over a $1,000 in these states in that the attorney is paid from 70-80% of this fee, plus another 70-80% of the title fees as an agent for faxing in their order, or emailing it to Chicago Title, Fidelity, First American or any other assorted title company. So if a purchase is a $100,000 in these states, you start out with one point in title fees.
Closing Costs And Fees
Most lenders have $1200-$1700 in real costs associated with a mortgage. Add another point to point and a half. QM makes some exceptions for loans under a $100,000 but it still makes these loans cost prohibitive coupled with the fact the same amount of effort is needed for a $300,000 loan as a $110,000 loan. What counts a fee a point calculation is a whole different story.
Income Qualification Under Qualified Mortgages
QM Mortgage also must be full income qualified. This means they can’t be stated income, no doc, equity only driven, or the “liar loan” you heard on the news. These loans where mostly driven be Credit Scoring. Credit Scoring was used to try and eliminate the actual underwriter and underwriting process so more loans could be funded and securitized on Wall Street as quickly as possible. Credit Scoring although still here, is now less of a cancer in that it is used as mainly a parameter for a human to gauge and underwrite files. Of course, it still doesn’t always make sense.
Non Qualified Mortgages
Under QM many loan types are no longer qualified such as:
- Interest only
- 40 year amortization
- Balloons or demand features( some exceptions are permitted to 2016)
- Negative Amortization
- Qualification based on lower initial or teaser interest rates
The list is longer, but I am just trying to give you the general mission of the QM Mortgage.
What is considered a small creditor holding and servicing their own mortgage with assets under $2 billion are also QM exempt. $2 billion does not seem so small to me.
Liquidity And Stability
I believe QM has merit and is necessary for mortgage lending continued liquidity and stability in the secondary market. However, I believe the pricing and fee side of it is a mess and screws certain rural, inner city and often minority borrower types by making homeownership cost prohibitive to lenders. This doesn’t just give lenders the excuse to redline. They effectively have to do it to stay in business. I have always believed this segment of the population should be afforded the greatest protections, but QM in many cases is doing just the opposite.