Lenders are increasingly anxious about how to deal with
Although HUD mostly followed CFPB's regulation, it made two significant changes, dropping a required 43% debt-to-income ratio and removing the cost of mortgage premiums from an interest rate pricing cap.
While the HUD version of QM will help ensure weaker borrowers can continue to receive a Federal Housing Administration loan, lenders are concerned about to implement two separate definitions of QM, including the impact on the loans they ultimately approve to sell. The situation is being exacerbated by the government shutdown, with FHA personnel unavailable to provide clarification.
"Everybody is just puzzled right now," said David Bryles, executive vice president of Iberiabank Mortgage in Little Rock, Ark. "It's the process of having to test for every loan before closing to make sure it's not outside of QM. And that's going to take the form of credit tightening and a slowing down of the process, and making the process more expensive for the borrower because we can't take a loan that's not going to be sold into a mortgage-backed security during the life of the loan."
Incorporating HUD's alternative definition has had a chilling effect on new originations, some said. Alan Openshaw, a loan officer for Cornerstone Lending, a mortgage broker, said many brokers are still waiting to hear from bankers about what type of FHA loans they will accept based on the new criteria.
"It takes a while for our mortgage banks to get their legal team to look at it so we have to wait on guidance from the lenders," said Openshaw, who added that American Banker notified him of HUD's proposal before any lender had. "We can only provide what bankers offer to us so as the rules change, they tell us."
The response to HUD's proposal, issued last week, has been muted compared to the immediate outcry when the CFPB first released its QM proposal in January.
Observers said that the silence is likely because lenders are overwhelmed trying to implement the new mortgage rules prior to a January 2014 implementation deadline. The shutdown has also made the situation worse, as HUD has been working with limited staff and those most familiar with the FHA were furloughed the day after the agency's plan was unveiled.
Lenders are unlikely to get clarification from FHA until the government reopens.
"That's the concern across both consumer advocates and industry trade association groups because we want this to be thoughtful, we want this to appropriately protect consumers and the industry," said David Berenbaum, chief program officer at the National Community Reinvestment Coalition. "Unfortunately, the government shutdown puts stress on that."
Many lenders are keen to ensure compliance with QM because it provides them with greater legal protections from liability, provided the loan is prime and meets certain underwriting criteria.
But the HUD plan differed from the CFPB's definition in terms of which loans qualify for the greatest legal protection, called safe harbor. Under the HUD proposal, a QM loan cannot cost more than the average prime rate plus 115 basis points. But the CFPB's QM definition puts that cap at 150 points. The difference is due to mortgage insurance premiums, which are not part of HUD's cap, but are part of the CFPB's.
HUD decided to exclude mortgage insurance costs because most FHA loans have an ongoing cost of 135 basis points for the insurance alone, which means they would not qualify under the CFPB's definition.
"My impression is that there's going to be very high percentage of FHA loans we write that will meet the test and we will have to make adjustments," Bryles said. "We want to ensure that every loan meets the safe harbor protection even though the regulators have said it's not a violation of the law to go above that. But the loans still have to be sellable."
Though Openshaw said that HUD's proposed definitions are easier for the industry to comply with, the pricing threshold may still squeeze out some small dollar FHA loans that often have higher fixed prices.
Openshaw fears many brokers will either end up eating their own costs to get a loan closed or stop offering small-dollar, high-cost loans altogether. For example, he said he recently worked on a loan for six months and by the time they reached settlement, the lender said it would become a "high-cost" loan unless the broker ate the fees. So they did.
"I'm not only trying to protect the customer but I'd also like to get paid and there will be those brokers who are more reluctant to do lower-amount loans because of that rule," Openshaw said. Ultimately, "people are left with fewer choices."
HUD has also dropped a key definition in CFPB's QM rule: a 43% debt-to-income ratio requirement. HUD said it wasn't necessary because it established requirements for lenders to verify the borrower's ability to repay.
Based on HUD's economic analysis of its proposal, "over a third of what was originated now would not meet the QM definition" based on that DTI threshold, said Paul Noring, a managing director in the valuations practice at Navigant Consulting. "Lenders are still digesting this but when they step back from it, it's actually going to be pretty beneficial to them."
Openshaw said lenders will likely still stick to the 43% DTI ratio, adding that only recently have lenders begun approving some "skinny" files of borrowers with lower credit scores because the lender could instead use the DTI threshold to get the loan approved.
With HUD now having removed the DTI requirement, "we'll have to wait and see how this plays out," Openshaw said. "I think lenders will stick to it for a while and use compensating factors when it's over the 43% DTI threshold."
HUD is under a steep time crunch to finalize its QM proposal in time with the CFPB's version that takes effect Jan. 10. With limited staff to vet the comments coming in through the end of the month, observers fear HUD will be rushing.
If the agency cannot finalize its proposal by the CFPB's effective date, new mortgages coming into HUD will have to meet the CFPB's QM version instead. This could tighten credit for the lower credit score and income borrowers who often get loans through HUD's affordable housing programs.
"The non-QM market is going to be a dead space for a while," Bryles said. "The deadline is approaching and there's really no relief in terms of implementation so I think everybody's focus is vetting their systems so we can test for the guidelines and know that our loans can be within the safe harbor If their mission is to sell loans, we're going to try not to fall outside of that."
