QRM: Clarity in housing finance

It took nearly three years, but the Qualified Residential Mortgage (QRM) rule has been finalized by the Federal Deposit Corporation, which should translate into a win-win for homeowners who are relocating.

The new rule includes a broad definition of QRM and aligns with the Qualified Mortgage (QM) standard implemented earlier in 2014. The biggest sticking point in the passage of the QRM was the high down-payment requirements that previously proposed QRM rules imposed.

Highlights of the new QRM rule:

• Loans are generally considered qualified if the borrower’s debt-to-income ratio is 43 percent, which is the same requirement in QM.
• There is no high down-payment requirement.

A loan must have:

• Regular periodic payments that are substantially equal.
• No negative amortization, interest only or balloon features.
• A maximum loan term of 30 years.
• Total points and fees that do not exceed 3 percent of the total loan amount, or the applicable amounts specified for small loans up to $100,000.
• Payments underwritten using the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment is due.
• Consideration and verification of the consumer’s income and assets, including employment status if relied upon, and current debt obligations, mortgage-related obligations, alimony and child support.

The new rule takes effect in October 2015.

How does the QRM rule help me?

The new rule sets requirements a loan must meet to be considered safe – one that is eligible to be sold to investors as part of a mortgage-backed security without the lender having to retain 5 percent of the loan amount on its books. Lenders should be able to make more loans available to consumers in addition to making the loans less expensive since there are no more risk-retention costs passed along to the borrower.

“Realtors are confident that the new QRM rule will encourage sound and financially prudent mortgage financing by lenders while also ensuring responsible homebuyers have access to safe and affordable credit,” Steve Brown, president of the National Association of Realtors (NAR) said. “The synchronization with the QM rule will provide lenders with much needed clarity and consistency as they apply the new standards to loan applications while also providing a framework to bring more competition to the secondary mortgage market.”

Brown went on to say that the NAR strongly opposed earlier versions of the rule that included 20 to 30 percent down-payment requirements. “That would have denied millions of Americans access to the lowest-cost and safest mortgages,” he added.

Background about QM and why it was needed

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created the Consumer Financial Protection Bureau, which wrote the rules on how mortgages are approved. All lenders must assess income, assets, credit history, other debt obligations and employment status. If lenders do not follow through on these evaluations, borrowers who cannot make their mortgage payments can contest foreclosures on the grounds that the lenders did not properly judge their financial standings and risk.

QMs offer lenders additional protection against litigation. In a QM mortgage, borrowers cannot spend more than 43 percent of their monthly pre-tax income on all debt – and that includes a home mortgage, minimum credit card payments and car loans. Borrowers will need to prove assets and income through pay stubs, bank statements and income tax returns.

Lenders have the option to offer either a QM or non-QM loan as long as they can verify that the borrower has the ability to repay the loan. One of the advantages of a QM loan is that it can be purchased or guaranteed by Fannie Mae or Freddie Mac.

How much can you afford?

If you are about to relocate and in doubt about how much house you can afford, this handy calculator can help. Just fill in a few facts, and you will instantly see your debt-to-income ratio and how much of a mortgage you can handle, great information to have before you step inside a bank.