Dodd-Frank 2014 Is Here

Dodd-Frank 2014 Is Here

January 14th ushered in the new Dodd-Frank provisions for mortgage loans, bringing about significant changes that will eventually change the mortgage landscape. Below are some questions regarding some of the provisions of this new law.

I’m hearing about ATR and QM mortgages.  What in the world are those?   As with any good government regulation, you have to give your programs initials or they aren’t legitimate.  ATR stands for “Ability to Repay” and QM stands for “Qualified Mortgage”.  Both are part of the new rules that go into effect on January 14th.

So how will they affect me?  ATR rules govern the underwriting standards requiring the lender to determine that the borrower has the ability to repay their loan.  There are eight standards the lender must adhere to, including verification of income and assets (with tests for continuity of income), taking into account the maximum payment that might come about when an Adjustable Rate Mortgage adjusts to its lifetime cap rate, and by including taxes, insurance, HOA dues, and all other non-mortgage obligations in the borrower’s debt to income ratios.  Quick translation:  this is not a significant change, other than for borrowers who pay alimony (it may now be considered a debt rather than a reduction of income), and for borrowers who take out an ARM (Adjustable Rate Mortgage), where the payment resulting from the cap rate will be used to calculate debt to income ratios rather than the initial rate.

How about QM?  That is a bit more complex.   QM is designed to protect lenders from lawsuits where the claim is that the lender made their loan knowing the borrower could not repay it.  (This seems rather stupid, but the truth is, many loans made prior to 2008 counted on escalating property values to cover any foreclosure losses, so “No Income Verification” and “No Doc” loans were made with no regard to the borrower’s capacity to repay the loan).   The protection offered by QM comes with some potentially bad consequences for homebuyers.  QM will prevent any loan from having negative amortization, from having interest only payments, balloon features, or a loan term longer than 30 years.  Some of these features made home ownership more affordable, but will not be possible now under QM.   QM will limit fees that can be charged on mortgage loans, and will not allow debt to income ratios (DTI) to exceed 43%.   This may affect high net worth borrowers who have more in the bank than they are borrowing, but will be turned down because they don’t meet the DTI standard.

How do you see this all playing out?   QM does not require all mortgages to meet their standard, it just gives the lender no legal protection if they do not adhere to QM.  I believe that the marketplace will determine that certain borrowers represent a reasonable risk even if they are outside the QM guidelines, and that eventually we will have mortgage programs to address this.   However, it may be a year or two before these come to the market.   In the meantime, most borrowers who qualified in 2013 will continue to qualify under ATR and QM guidelines, but may have fewer loan programs to choose from.