QM mortgage stands for qualified mortgage. And it’s come a few years too late. Will it help?

Pre-2008, a lot of things were done in the mortgage industry that were not nice. Some mortgage brokers and loan officers and real estate agents and attorneys and investors went to jail and were fined a few thousand dollars to a few million. A few large banks were fined billions, a bunch were fined millions but no bank or banker or bank employee went to jail.

The QM comes together with ATR. ATR stands for ability to repay. As of 01-14-2014 it is the law, lenders must make a good faith effort to lend only to people who have a good enough financial situation to repay the mortgage loan. As of the same date, some mortgage loans are going to be considered QM mortgage loans and others are not.

The Good About QM Mortgage Loans

Qualified Mortgages are based on ideas that should have been incorporated into the mortgage industry a long time ago, namely:

  • Borrowers should be in a good financial standing, good enough that they can repay the loan
  • The loans should be safe for borrowers
  • The loans should be easy (easier) to understand by borrowers.

The above means that Qualified Mortgages do not have risky features (so, no balloon payments, no interest only mortgages). They also limit the amount someone can borrow (by reducing the maximum DTI, aka, debt-to-income ratio) and the amount of upfront fees (i.e. origination fees).

Of course, not all loans have to be Qualified Mortgage loans. It’s up to lenders which loans they want to give. But giving QM loans offers them some protection against litigation and in cases of foreclosures. Conversely, QM loans remove some of the rights of borrowers in cases of litigation and foreclosures.

The good thing, though, is that even if a loan is not going to be QM, lenders have to evaluate borrowers’ financial situation and make sure they can repay the loan based on its terms. So, if you are looking to get a jumbo loan, or one with a balloon payment, you still can, if you go to a lender that deals in them and you can prove that you have the ability to repay.

Unintended Negative Effects of QM Loans?

Lenders have been preparing for this, so most of what QM and ATR are about is already in place. So, it’s been said that not much will change yet future mortgage / real estate meltdowns will be avoided. And, did I say it, not much will change. I’m not entirely sure. Here’s why:

  • The maximum DTI (debt-to-income ratio) was reduced from 45% to 43% for conventional mortgage loans (i.e., loans that Fannie Mae and Freddie Mac will buy… i.e., loans up to $417,000 in most part of the country for single family houses, more for 2-4 unit buildings).

Call me silly, but if you run into problems if your DTI is 45%, you’ll run into problems if your DTI was 43%. Or, conversely, if you don’t run into problems if your DTI is 43%, you will not if it’s 45%. Because the DTI of a person that makes $1,000 a month is $430 under the new rule; it was $450 under the old one. The difference isn’t much. The same is true for a person whose income is $4,000. The difference between 43% and 45% DTI’s is $80/month. If you make $4,000 a month, you’ll find the $80.

I have another problem with the 43% DTI across the board: You’re not left with much after you pay your debt if your income is $1,000 a month. You’re left with a good chunk if it’s $10,000. Depending on how you look at it, it’s unfair to either the first or the latter.

  • The limit on upfront fees. Origination fees on loans of $100,000 can only be 3%.

Mortgage brokers have to disclose all their fees, banks do not. There are more than one way of getting paid for originating a loan: getting money upfront, rolling the cost of the loan into the interest rate (get no money upfront, collect it in small monthly installments), or get some money upfront and roll the rest into the interest rate. Mortgage brokers can only get money upfront. Banks can do it all three ways. But their all limited to 3% in origination fees. That, in my opinion, will end up meaning that people looking for loans of $100,000 and close to that amount will have fewer options.

Because mortgage brokers’ fee is not the only thing that falls under ‘origination fees.’ There’s also the wholesale lender’s underwriting fees. (Other fees may also be included.)

Three percent of $100,000 is $3,000. If the underwriting fee is $850 (a common enough amount) and the mortgage broker is left with $2,150. A mortgage broker who normally gets 2.5% for originating a loan, loses $350 ($2,500-$2,150). Three percent of $200,000 is $6,000. If underwriting fee is $850, the mortgage broker’s fee can be as high as $5,150. The same mortgage broker who normally gets 2.5% for originating a loan, has his / her fee unchanged by the 3% limit (2.5% of $200,000 is $5,000, or $150 less than it’s needed to hit the 3% limit.)

Banks make less money too. And $100,000 loans are not easier to originate than $200,000 loans.

Yes, there are some other considerations: some people who need a small loan today will need a large one in a few months. There are some laws against discriminating… and a lot of the $100,000 to $150,000 loans are for one or another minority group. So, the effect will not be sudden.

But, call me cynical: people will find ways to avoid the loans that make them less money in favor of the ones that make them more money. Do you think I’m too cynical?

  • A large reason, the largest? of the mortgage and real estate meltdown of 2008 had to do with mortgage securitization. None of that has changed.

A homeowner wants to buy a house and he needs a mortgage to do so. He goes to a mortgage broker or a bank. The mortgage broker always originates the loan without funding it. He or she finds a wholesale lender or some other kind of investor to put up the money. Then they sell the loan to an investor. Banks fund the loan. Some of them (a lot of them these days) sell the loan to an investor. The investor can sell the loan again.

Buyers of loans buy insurance that banks sell. The insuring bank can buy insurance from another company for the same loan.

When you originate a loan but don’t hold it, you might be inclined to be less strict than if you originate it and hold it.

Back in the first years of 2000 that lead to a lot of sub-prime loans being made. Sub-prime loans are loan made to people who may have a hard time making regular payments. FHA loans, i.e., loans for people with spotty credit or employment history, are still going strong today. So, do you think I’m too cynical? Do you think I’m crazy?

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