Non-Qualified Loan

CFPB Assesses Effectiveness of ATR/QM Rule, Seeks Public Input

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The Consumer Financial Protection Bureau is assessing the effectiveness and impact of the ability-to-repay/qualified mortgage rule. It is currently seeking public input to help with its assessment on the ATR/QM rule, which will be made public by January 2019.

CFPB Director Richard Cordray in his agency’s request for information said, “The Bureau anticipates that the assessment will primarily focus on the ATR/QM rule’s requirements in achieving the goal of preserving consumer access to responsible, affordable credit.”

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ATR/QM Rule: The Creation

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted following the financial crisis of 2008. Enshrined in the Dodd-Frank Act are:

  • A set of new standards requiring mortgage lenders to assess a consumer’s ability to repay a mortgage.
  • A class of qualified mortgage loans that don’t contain risky features, e.g. negative amortization, balloon payments, etc., and must comply with the ATR.

To make these rules effective and clear, the CFPB is authorized by Congress to issue implementing regulations. The CFPB consequently issued the Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z) in January 2013, as further amended and became effective in January 2014.

ATR/QM Rule: The Assessment

To fulfill its mandate, the CFPB is conducting an assessment of the effectiveness of the ATR/QM rule. The assessment involves a review of the rule’s major provisions, as outlined:

  • The ATR requirements, including the eight underwriting factors a creditor must consider;
  • The QM provisions, with a focus on the DTI threshold, the points and fees threshold, the small creditor threshold and the Appendix Q requirements, and
  • The applicable verification and third-party documentation requirements.

It will look at how these major provisions influence consumer outcomes, i.e. mortgage cost, origination volumes, approval rates, and subsequent loan performance.

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Of special interest to the CFPB is the effect of the rule on certain groups borrowers who:

  1. Are generating income from self-employment
  2. Are anticipated to rely on income from assets to repay the loan
  3. Rely on income from assets to repay the loan
  4. Rely on intermittent, supplemental, part-time, seasonal, bonus, or overtime income
  5. Are seeking smaller-than-average loan amounts
  6. Have a DTI ratio exceeding 43%
  7. Are in the low and moderate income bracket
  8. Are minority borrowers
  9. Are rural borrowers

The agency will also examine the impact of the Temporary GSE QM category, a set of QM loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac with the earlier termination or expiration of the category included in the review. This set of QM loans will expire on January 10, 2021, or when the conservatorship of the GSEs ends.

Interested parties can submit comments electronically, via email, mail or hand delivery.

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A Mortgage’s Downpayment: Should It Go Higher or Lower?

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Bank of America CEO Brian Moynihan recently talked about lowering the standard downpayment on homes to 10% from 20%. If applied, it could certainly boost homebuying by millennials whose homeownership rate is the lowest among the five age groups.

Pending the mortgage industry’s action on Mr. Moynihan’s suggestion, let’s discuss the role the size of downpayment plays in today’s mortgages.

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The 20-Percent Downpayment Standard

Mr. Moynihan in an interview with CNBC believes that the move to lower the standard downpayment would not introduce much risk to lenders but would help more consumers get mortgages.

While lenders and mortgage programs as discussed below require varying downpayment sizes, 20 percent of the home’s purchase price is considered a gold standard in the industry. This rule is based on the guidelines set by government-sponsored entities, Fannie Mae and Freddie Mac.

So that lenders can sell their mortgages to either GSE, they must conform to their underwriting standards, downpayment and all. Fannie and Freddie are the biggest purchasers of mortgages in the U.S., selling to either entity will enable lenders to recoup funds they can lend to other borrowers.

Putting 20% of the home’s purchase price is beneficial to homeowners, too.

  1. There’s no private mortgage insurance. An insurance meant to protect the lenders in the event of default, PMI is separate from the compulsory homeowner’s insurance. The PMI may be added to your monthly mortgage premium, paid upfront or both as required by the lender.
  2. There’s a higher chance of getting approved. A higher downpayment lowers the risk for the lender to make the loan. A big plus, so to speak, to your loan application.
  3. There’s a smaller loan to take out. With you contributing 20% of the home’s price tag, you’ll only be borrowing the remaining 80%. This lessens your monthly payment. Say you take out a 30-year loan on a home worth $200,000 and then put down 20% ($40,000) at 4.02%, you’ll get a monthly payment of $766. With a 0% down, your monthly payment will be $957.
  4. There’s a lower interest rate to pay for borrowing. Because of the lower loan amount, thus the lower risk for the lender, a mortgage with a 20-percent down has a lower interest rate.
  5. There’s equity already stored in the home. Equity is pretty handy when you refinance your existing mortgage and do a cash-out refi. Having a 20% equity early on in the home can help mitigate the ill effects of declining home values.

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Less Than 20%?

For all its benefits, the 20-percent standard can be too high a hurdle for homebuyers to overcome. Partly to encourage more first-time homebuyers, there are mortgage programs that ask a downpayment below that threshold.

First off our list are low-downpayment mortgages from FHA. Its mortgages can require as little as 3.5% of the purchase price. FHA loans are also lenient to first-time homebuyers with not-so-high scores and high debt-to-income ratios. An FHA loan has mortgage insurance premiums, which are paid upfront and on a monthly basis.

Then there are conforming loans specially made for first-time homebuyers from Fannie Mae’s HomeReady™ with 3% down and Freddie Mac’s Home Possible™ with 3% to 5% downpayments.

Conventional loans, which don’t conform to GSE standards and not part of government programs, can also be taken out with less than 20% down. You’ll need a PMI though.

Who would forget 100-percent mortgage financing for veterans and families in rural areas? The VA and USDA loans require little to no downpayments to better serve their targeted demographics. Each loan program does not require a mortgage insurance but a funding fee for VA loans and a guarantee fee for USDA loans, respectively to cover losses in the event of default.

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Home Matters: How Much Mortgage Can You Afford?

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Home Matters- How Much Mortgage Can You Afford?

The reason why some homeowners struggle with their mortgages is because they qualified for more than they can afford. When you borrow more, you’ll have to pay more. So if you are confident in buying a home, take time to go over your financial situation and ability at this point. Your goal is to come up with a realistic answer to the question, “How much mortgage or house can I afford?”

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How Much Is Your Mortgage?

These factors can help you determine how much mortgage debt you can comfortably take on.

1. Income and debt. If you were to borrow for a home, would you be able to pay it along with your existing monthly obligations given your current income?

Add your income before taxes from your basic salary, part-time work, investments, bonuses, and commissions. In mortgages, there is the debt-to-income ratio to help determine how much of your gross monthly income goes to your debt payments, including a mortgage.

For example, if you gross $10,000 a month and have monthly debt obligations totaling $3,000, your DTI is 30%. Mortgage lenders in general would like your monthly mortgage payment to not exceed 28% of your total monthly income. This is called the front-end ratio that is dedicated to housing expense.

Then there is the back-end ratio where all your other debt obligations are taken into account. Mortgage lenders usually want a back-end ratio of 36% or lower.

Use the DTI as your guide in finding the right loan size and the right home price.

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2. Downpayment. The size of your downpayment will weigh in your mortgage affordability.

While there are mortgage programs like USDA and VA that can offer up to 100% financing, most mortgages require you to cover a percentage of the purchase price.

Downpayments, if they are large, allow you to take out a smaller mortgage loan and thus lower monthly payments.

3. Monthly payment. Other than the loan amount and the interest rate, your loan length will determine how high or low your monthly payment will be.

If you take out a 30-year fixed-rate mortgage, expect your monthly payments (principal and interest) to be really low as the loan gets stretched for 30 years.

But if you borrow with a 15-year fixed-rate loan, the monthly payment will be higher because of the expedited repayment period. This will mean more savings in interest costs.

Your goal in your mortgage endeavor is to identify the mortgage that you can responsibly pay for, something that you can afford in the long run.

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Ever Considered a Mortgage From a Non-Bank Lender?

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Ever Considered a Mortgage From a Non-Bank Lender?

A Washington Post report back in February revealed that non-bank lenders made the bulk of mortgages last year. Post-crisis regulations proved too much for the bigger banks who are expected to make perfect loans; otherwise, they might face penalties and lawsuits for non-compliance. With that, is it easier to apply for a mortgage with a non-bank lender? Ever considered getting one?

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Who Are Non-Bank Lenders

Financial institutions that are purely engaged in lending and not offering depository and checking accounts are considered non-bank lenders.

These non-bank lenders often bank on their online platform, which makes them more accessible to the general public. They are also at the forefront of developing technologies that speed up the usual tedious processes of mortgage underwriting, offering quicker results and lesser paperwork for their customers.

If convenience and speed did not win you over, non-bank lenders have flexibility; it’s something that the average borrower could appreciate in today’s tightened credit environment.

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What Can They Offer

Understandably, traditional lenders require a lot of things for borrowers to get approved. This “seemingly” high bar leaves potential mortgage borrowers in the cold; some don’t even attempt to apply for a mortgage lest their credit score might cost them their application.

This is the market a non-bank lender could try to serve. It can cater to borrowers with low credit scores, high debt-to-income and loan-to-value ratios, etc. Being not as heavily regulated as their bank counterpart, a non-bank lender can be more lenient toward less-than-perfect borrowers.

Non-bank lenders may offer competitive rates and because they have lesser overhead costs, they can pass on fewer fees to borrowers.

Some of these lenders also have an array of nontraditional mortgage products, like subprime mortgages, stated income loans, and low-doc mortgages. This presents you with choices when buying a home that a standard mortgage might not be able to accomplish.

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Financial CHOICE Act Incorporates Safe Harbor Provisions for Creditors

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Financial CHOICE Act Incorporates Safe Harbor Provisions for Creditors

The Financial CHOICE Act of 2017, which seeks to replace and/or repeal certain aspects of the Dodd-Frank Act, incorporates safe harbor provisions from the Portfolio Lending and Mortgage Access Act.

These provisions seek for an expanded definition of a qualified mortgage to include certain mortgages held on portfolio and provide safe harbor to certain creditors from lawsuits arising under the QM rule, according to Rep. Andy Barr who authored the Portfolio Lending and Mortgage Access Act as reintroduced in April 2017.

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What’s Proposed

Both bills contemplate amending Section 129C of the Truth in Lending Act (TILA) to add safe harbor protections for (i) creditors who are depository institutions under Section 19(b)(1) of the Federal Reserve Act and (ii) mortgage originators.

1. Depository Institutions

Specifically, a depository institution will not be sued for failing to comply with the minimum standards set forth by TILA, including special appraisal requirements for higher-priced mortgage loans, as it relates to a residential mortgage loan.

Banking regulators, which refer to the Consumer Law Enforcement Agency (the Consumer Financial Protection Bureau as will be renamed if the Financial CHOICE Act is enacted) and the National Credit Union Administration, are compelled to treat the loan as a qualified mortgage if the depository institution has held the loan on its balance sheet since the origination date, and that prepayment penalties on the loan adhere to the limitations set by the TILA.

If a depository institution transfers a loan that it originated to another depository institution due to the former’s bankruptcy or failure or purchase, the depository institution that transferred the loan is deemed to have complied with the above provision.

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2. Mortgage Originators

Likewise, mortgage originators will be safe from lawsuits under TILA for leading consumers to residential mortgage loans if they are able to prove the following:

The creditor of the loan is a depository institution and has told the mortgage originator its intent to keep the loan on its balance sheet throughout the life of the loan. And that the mortgage originator will inform the borrower of the creditor’s intention to keep his/her loan on its portfolio.

A mortgage originator is defined under TILA as a person who assists a consumer in obtaining a residential mortgage loan, who offers or negotiates terms of that loan, or takes an application for such a loan, among other things.

Balloon Loan

Both bills clarify that the amendments will not be construed to prevent a balloon loan from qualifying for the safe harbor set forth in TILA Section 129C(j) if such a loan meets all the requirements of subsection (j).

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Why Is It Difficult for the Self-Employed to Get a Mortgage?

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Why Is It Difficult for the Self-Employed to Get a Mortgage?

It’s an age-old question that gets validated every now and then by stories of one self-employed struggling to get a mortgage. Let’s look at the common barriers to mortgage financing for self-employed borrowers and how they can get past each hurdle.

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Are you self-employed? Define self-employed.

Sometimes, the cause of the problem lies with not knowing your true status. And the key to that lies with the IRS.

Are you engaged in a business as a sole proprietor or an independent contractor? Are you a member of a partnership that is engaged in business? Or are you in a business, e.g. part-time business, for yourself? Most likely, you are self-employed per the IRS standards.

And this self-employment status should reflect in the kind of taxes you are obligated to pay. There are two:

  1. An income tax return filed annually
  2. An estimated tax paid quarterly

Are you deducting business expenses?

Being self-employed in the eyes of the IRS, you may claim for deductions on expenses incurred in your line of business. Still, deductions from business expenses and other write-offs can reduce taxable income and lead to tax savings.

Therein lies another hurdle. The income you have in mind is different from the final taxable income calculated by the IRS. To the lender, you appear to be making less compared to what you are actually earning before tax.

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With a lower income on paper, your debt-to-income could be also affected. The debt-to-income ratio’s purpose is to determine whether you can comfortably take on the new mortgage debt. There are two ways to calculate the DTI with the front-end ratio, i.e. total housing costs relative to the gross monthly income is used for mortgages.

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When coming up with a tax plan to maximize your deductions, factor in the possibility of getting financing so as not be hurt by tax write-offs. It’s high time that you work with a CPA on the best tax approach.

Your CPA can also certify that you are indeed self-employed, which you can show to the lender as further proof of your status.

Lenders operate based on their guidelines for a specific mortgage product. While your status as a self-employed may prove to be extra challenging than the others, it doesn’t mean you’ll be rejected outright. Plan ahead and choose the mortgage loan that fits your need for a home.

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MBA Proposes Changes to Existing ATR / QM Rules

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MBA Proposes Changes to Existing ATR QM Rules

The Mortgage Bankers Association has proposed changes to the existing Ability-to-Repay and Qualified Mortgage (QM) rules.

By these tweaks formally submitted to Senators Brown and Crapo of the Senate Committee on Banking, Housing and Urban Affairs, the MBA hopes for an expanded QM credit box where more lenders can make QM loans and serve more borrowers.

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ATR / Qualified Mortgages: Now and Future

The ATR essentially requires lenders to make a determination that a borrower can reasonably afford to repay his/her mortgage. Lenders can comply with this requirement by making Qualified Mortgages.

Under QM rules, there is a presumption of compliance that loans originated as QMs per their requirements. This is called a safe harbor and protects lenders from being sued by borrowers who claimed that the lenders did not have any reason to believe they could afford the loan.

Notwithstanding the safe harbor provision, lenders face hefty fines and penalties if they fail to meet the ATR rule.

In the face of a potential costly litigation, the MBA found that lenders have been making compliance safe harbor QM loans only. This prevents borrowers who could have qualified for a QM loan from accessing “safe, sustainable and affordable mortgage credit.”

Consequently, the MBA proposes these changes that would improve on or update existing ATR/QM rules, as follows.

  1. An expanded safe harbor. That the safe harbor provision will be applied to all mortgages that meet the QM standards. Specifically, the MBA proposes to increase the QM safe harbor threshold from 150 bps to 200 bps over Average Prime Offer Rate (APOR), a benchmark rate.
  2. An updated “small loan” definition. That the ATR rule be amended to update the basis of a small loan to $200,000 from $101,953, where points and fees may exceed 3%. This allows for more borrowers with smaller loans to qualify as QM loans.
  3. A broadened right to correct technical errors. That the MBA seeks an amendment that would allow for correction of errors in case the three-percent limit on fees and points is exceeded, debt-to-income ratios have been miscalculated, and other technical errors have been made.
  4. A revised definition of points and fees. That the MBA calls for fees paid to service providers that are affiliated with lenders to be excluded from the computation of loan fees and points. This creates more competition among third-party providers.
  5. A replacement of the QM patch. QMs are required to have a DTI ratio limit of 43% or as required by FHA, Fannie Mae or Freddie Mac. The MBA urges the CFPB alongside stakeholders to develop a set of rules including compensating factors that will address loans with higher DTI ratios. This will replace the QM patch and the 43-percent DTI cap.

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Downpayment Can’t Be Verified as Asset on Non-QM Loans, Says CFPB

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Downpayment Can’t Be Verified as Asset on Non-QM Loans, Says CFPBThe Consumer Financial Protection Bureau released its spring 2017 Supervisory Highlights touching on, among other things, the ability-to-repay rule as it relates to the origination of non-qualified mortgages or non-QM loans. In line with that, the Bureau clarified that a downpayment can’t be treated as an asset for verification purposes under the ATR.

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Verification of Income and Assets

The ATR rule requires lenders to make a reasonable and good faith determination of a borrower’s ability to repay his/her mortgage. Consequently, the ATR has set minimum guidelines with which lenders can incorporate in their own underwriting standards.

To form the basis of a borrower’s repayment ability, the lender will consider the following eight factors under 12 CFR 1026.43 (c) (2).

(i) the consumer’s current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan;
(ii) if the creditor relies on income from the consumer’s employment in determining repayment ability, the consumer’s current employment status;
(iii) the consumer’s monthly payment on the covered transaction, calculated in accordance with paragraph (c) (5) of the ATR rule;
(iv) the consumer’s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made;
(v) the consumer’s monthly payment for mortgage-related obligations;
(vi) the consumer’s current debt obligations, alimony, and child support;
(vii) the consumer’s monthly debt-to-income ratio or residual income; and
(viii) the consumer’s credit history.

The Bureau noted that a lender can verify a borrower’s income or assets as set forth above and on reliable records from third-party sources.

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If a lender deems to verify a borrower’s assets in making non-QMs; it should reasonably and in good faith determine that the verified assets were indeed sufficient to establish the borrower’s ability to repay.

Moreso that the lender who relied on those verified assets and not on income can properly determine that income is not necessary for a reasonable and good faith determination of the borrower’s repayment ability.

Downpayment not an Asset

In its supervisory highlights, the CFPB made clear that downpayment is not an asset and is excluded from the verification of either assets or income under the ATR rule.

The Bureau put emphasis on point (i) above whereby the “value of the dwelling, including any real property attached to the dwelling, that secures the loan” is excluded from a borrower’s current or reasonably expected income or assets to be verified by the lender.

A downpayment forms part of the house securing the QM loan. While the size of the downpayment can decrease the loan amount and thus enhance the chances of it getting repaid, there is no direct link between the downpayment size and ability-to-repay performance going forward. Add to that the downpayment is not part of the ATR’s minimum standards for underwriting.

“Therefore, standing alone, down payments will not support a reasonable and good faith determination of the ability to repay,” the CFPB wrote.

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The Quest for Finding Non-QM Borrowers

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The Quest for Finding Non-QM Borrowers

Non-qualified loans make up 9% of the total mortgages originated in 2016. This goes to show that there is a market, a demand for non-QM loans among today’s homebuyers. The question is: who are these potential borrowers of non-QM loans? Where can loan officers find such non-QM borrowers?

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Identifying Non-QM Borrowers

Angel Oak, a wholesale lender who originates and services loans and sells them on the secondary market, is offering solutions geared toward tapping this “ massive untouched market” of potential borrowers of non-qualified mortgages.

These non-QM loan borrowers may have these characteristics:

  • Don’t qualify for agency loans backed or guaranteed by GSEs, Fannie Mae and Freddie Mac or GOCs like Ginnie Mae.
  • In self-employment.
  • Need alternative documentation for income verification.
  • Have low FICO scores.
  • Have a recent derogatory record, e.g. foreclosure, bankruptcy.

Qualifying These Non-QM Borrowers

Aside from opening the credit box for non-QM borrowers, loan officers offering nonqualified loans in their portfolio can increase their competitiveness in the mortgage market.

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According to Angel Oak, who recently completed its third non-QM securitization of $146.4 million, finding these potential borrowers is the first step. And they can be found through builders, accountants, realtors, and or financial advisers who closely work with these individuals.

These professionals can be considered as potential sources of referrals. Loan officers will have to educate these professionals about non-QM loans and their specifics. When the time comes that a client of such professionals will need a non-QM loan, they can recommend non-QM loan officers they know to that client.

Loan officers will also be given access to a proprietary tool that speeds up the qualification process. They can input info such as FICO scores, loan-to-value ratio, and loan amount, which can determine if a borrower is qualified for a non-QM. Loan officers can also use this tool to submit mortgage prequalification requests.

For borrowers whose profile might not take them to the traditional mortgage path, non-QM loans represent one possible route they can take. And there are many avenues to explore that option.

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2016 Share of Non-QM Loans Return to 2014 Level

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2016 Share of Non-QM Loans Return to 2014 Level

Against the backdrop of regulatory control, lenders made fewer non-qualified mortgages or non-QM loans in 2016. This is according to the latest real estate lending survey conducted by the American Bankers Association (ABA) among 159 participating lenders, made of commercial and savings banks.

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Regulations Take a Toll on Non-QM Loans, Lenders

The respondents cited increased regulations or regulatory burden in the mortgage market as their top concern.

The percentage of non-QMs in the total mortgage production dropped to 9% in 2016 from 14% in 2015. Last year’s figure was on the same level as 2014’s 10% around the time when the ability-to-repay rule and QM guidelines were first introduced by the CFPB.

The regulatory impact on lending non-QM loans can be seen by an increasing number of banks restricting themselves to making QM loans (31% in 2016 compared to 26% in 2015). Also, banks who primarily originate QM loans then make non-QM loans for a targeted market decreased, from 54% in 2015 to 45% in 2016.

ABA Executive Vice President Bob Davis observed in the trade group’s official journal, “Non-QM loans have been subject to heightened regulatory requirements and risk, reducing the willingness of banks to extend these loans to even the most creditworthy borrowers.

Sixty-one percent of the participating banks expect the ATR/QM rules to have a moderate effect on credit availability, while 29% believed the impact to be negligible and 10% rated the impact as severe.

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“Despite ongoing regulatory hurdles, community banks remain resilient in their ability to manage risk levels, increase productivity and introduce more first-time homebuyers into the market,” Mr. Davis pointed out.

In fact, more single-family mortgages were originated for first-time homebuyers in 2016. The percentage increased from 15% in 2015 to 16% in 2016, a record for the survey concerned.

What Makes Non-QM Loans?

The loans’ debt-to-income ratio was the main reason cited by banks why non-QM loans failed to pass the QM standards in 2016.

Other reasons cited were documentation requirements that prevented consideration of all income and assets, interest rate spread exceeded the available spread over the average prime rate, balloon payment, interest-only payment, and excessive points and fees.

A vast majority of banks who chose to originate non-QM loans kept these loans in their portfolio while a few sold them to investors directly or in the secondary market.

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