Written By: Glenn Michaels, Op-Ed Writer
As of January 10, 2014 the Qualified Mortgage (QM) rules become effective and HUD is no different. They too must have QM loans.
On December 11, 2013 HUD released their definition of a QM mortgage. All FHA case numbers issued on or after January 10, 2014 will be issued with the understanding that the borrower(s) will fit under the QM rules and regulations.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act requires HUD to propose a QM definition that is aligned with the “Ability to Repay” criteria set out in the Truth In Lending Act (TILA) as well the department’s historic mission to promote affordable mortgage financing options for underserved borrowers. HUD’s rule builds off the existing QM rule finalized by the Consumer Financial Protection Bureau (CFPB) earlier in the year.
In order to meet HUD’s QM definition, mortgage loans must:
• Require periodic payments without risky features;
• Have terms not to exceed to exceed 30 years;
• Limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans (except for Manufactured Housing;
• Be insured or guaranteed by FHA or HUD.
Currently, HUD does not insure, guarantee or administer mortgages with risky features such as loans with excessively long terms (greater than 30 years), interest only payments, or negatively amortization payments where the principal amount increases. In addition, HUD’s existing underwriting standards require lenders to assess a borrower’s ability to repay their mortgage debt. The new limit on upfront points and fees for all Title II non – manufactured housing FHA insured single family mortgages is consistent with the private sector and conventional mortgages guaranteed by Fannie Mae and Freddie Mac to attain qualified mortgage status under CFPB’s final rule.
The rule establishes two types of Qualified Mortgages that have different protective features for consumers and different legal consequences for lenders. The two types of Qualified Mortgages are called “Rebuttable Presumption Qualified Mortgage” or “Safe Harbor Qualified Mortgage” depending on the relation of the loan’s Annual Percentage Rate (APR) to the Average Prime Offer Rate (APOR), the rate for the average borrower receiving a conventional mortgage. The two categories of Qualified Mortgages are:
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A Rebuttable Presumption Qualified Mortgage will have an APR greater than APOR + 115 basis points (bps) + on-going Mortgage Insurance Premium (MIP) rate. Legally, lenders that offer these loans are presumed to have determined that the borrower met the Ability – to – Repay standards. Consumers can challenge that presumption, however by proving that they did not have sufficient income to pay the mortgage and their other living expenses.
Safe Harbor Qualified Mortgage will be loans with APRs equal to or less than APOR + 115 bps + on-going MIP. These mortgages offer lenders the greatest legal certainty that they are complying with the Ability – to – Repay standard. Consumers can still legally challenge their lender if they believe the loan does not meet the definition if a Safe Harbor Qualified Mortgage.
For more information go to www.fha.gov and read HUD’s press release regarding QM mortgages.
About The Author
Glenn Michaels - As an NAMP® Opinion Editorial Contributor, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
