In 2013, a new set of mortgage-lending rules could affect tens of thousands of home buyers in the United States.
Collectively, these rules are known as the qualified mortgage, or QM. They will essentially set the bar for lending standards and requirements. Thus, they will affect anyone who plans to apply for a home loan in 2013.
A Brief History of QM
The concept of a 'qualified mortgage' was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This legislation was signed into law in July 2010, in direct response to the economic crisis that began two years earlier. The 'Dodd-Frank Act,' as it is known, seeks to overhaul the financial system in the United States. Specifically, it aims to prevent the kinds of high-risk activities that caused the recession in the first place.
The qualified mortgage, or QM, is just one aspect of this far-reaching law. It's also one of the hottest topics in the real estate and lending world right now, and with good reason. The qualified mortgage is the government's attempt to reduce the number of risky loans that are generated in the United States.
The end goal, in theory, is to reduce the number of home foreclosures in the U.S., and to prevent another devastating housing crisis.
Ability to Repay the Loan
A key requirement for QM loans is the borrower's ability to repay. This means lenders will be required to verify and document the income and assets used to secure the loan. In other words, they must ensure the person has a reasonable ability to meet his or her monthly payments, at the time the mortgage is originated.
As a result of these rules, home buyers in 2013 will have to provide a mountain of paperwork when applying for a loan. This will include letters from employers, bank statements, W-2 statements, tax returns and the like.
There are also some debt-to-income (DTI) requirements written into the QM rules, but the specifics surrounding these criteria won't be announced until January 2013. Based on our conversations with the federal agencies that are finalizing the qualified mortgage, we expect these debt-to-income guidelines to mirror current lending standards and norms.
For instance, borrowers who spend more than 40% of their monthly income on their combined debt obligations could have trouble qualifying for a mortgage.
Features Prohibited by Qualified Mortgage Rule
In addition to the requirements mentioned above, the forthcoming QM rules will prohibit certain loan features. Specifically, the qualified mortgage seeks to eliminate or reduce high-risk products and features that increase the chance of foreclosure down the road.
For example, the borrower cannot put off repaying the principal amount borrowed. This was a common 'strategy' during the housing boom, wherein homeowners chose to pay only the interest that was due each month. These so-called 'interest-only' payments reduced the monthly costs, but they also caused the principal balance to grow over time. This is just one example of a high-risk loan feature that will be stricken down by the qualified mortgage rules.
The Consumer Financial Protection Bureau (CFPB) is required to finalize the QM requirements by January 21, 2013. They recently said they were on track to meet this deadline. Savvy home buyers will keep a close eye on this story as it unfolds.