There is a lot of talk about
the Consumer Finance Protection Bureau’s (CFPB) upcoming rules on the Qualified Mortgage or “QM”. Most recently, a group of 33 trade groups
from the financial services and housing industry sectors penned a joint letter to the
CFPB. They are advocating for a rule
structure that includes a broad definition of QM and safe harbor language.
"Our purpose is to
reiterate our very strongly held view that the QM should be structured as a
legal safe harbor with clear, well-defined standards," the trade groups
wrote. "The standards must embody requirements for safe mortgages for
consumers and specify the grounds on which there can be litigation or
enforcement action as to whether those requirements have been met.”
As I have read through the various news bulletins on this topic, I started thinking about what the QM would mean in the Appraisal Process. Specifically, the appraiser’s ability and prowess in reporting the availability of financing and what the possible implications will be.
As I have read through the various news bulletins on this topic, I started thinking about what the QM would mean in the Appraisal Process. Specifically, the appraiser’s ability and prowess in reporting the availability of financing and what the possible implications will be.
The QM Skinny
Dodd-Frank defined QM under “Ability to Repay” which prohibits mortgage lenders from making residential mortgage loans without regard to a borrower’s ability to repay the loan. Failure to comply would carry
significant penalties to lenders that could last the life of the loan.
The final QM rule from the CFPB is expected this summer and it is anticipated to clarify both the QM qualification
requirements and the presumption of compliance details. There are two hot button topics in the pending QM definition that are of interest to both consumer advocates and the lending industry: fee caps and down payment minimums.
Down with Down Payments?
On the surface, the argument
seems fair and balanced. Mandatory rules for "high" down payment
requirements would arguably cut-out a good number of credit-worthy
home-buyers. But, isn’t a lack of “skin
in the game” a hallmark symptom of the borrowers who found themselves in
distress as the markets turned downward? Its also interesting that a 20 % down payment was considered an underwriting basic.
Snowy Fee Caps on the Horizon
Secondly, and perhaps a more
worrisome detail to certain members of the industry is the cap on fees. The new standard mandates that a
mortgage cannot have points and fees that are more than 3% of the loan amount. However, the trade groups argue that the 3%
limit would restrict the availability of affordable mortgage credit as the fees are too low and would eliminate incentives to lend. Especially disconcerting to certain parties is the loss of revenues associated with “high cost/ high risk”
loans where higher fees and rates are charged to compensate for potential
losses since the borrower may default as he is “higher risk”.
Double Bubble
On the other hand, defining QM
too narrowly would have a whipsaw effect and throw many of today's loans and borrowers into the non-QM
markets, putting lenders and investors at a high risk of an “Ability to Pay”
violation. As a result, it is unlikely that these loans would even be made and if they are they will be far costlier, burdening those
families least able to bear the expense. In addition, these higher priced loans would NOT be exempt from including important protections against the very
practices and loan features that drove the highest failures in the mortgage
boom, features that are defined by the QM. Which of course would add more cost.
Availability of Financing
But back to my original thought,
the impact of QM to the residential real estate appraiser in the field. The appraiser
is supposed to report on the availability of financing in the
market for the subject property as a factor which may indicate the
reasonableness of buyer/seller activity. Will QM have the protective features its authors hope and thereby be a stabilizing
force? Or, will QM be as illusive of a
factor in reporting present market conditions as equity-takeout refinances were
during the boom? And, even if it reported by the appraiser, will the underwriter recognize the merit or relevance of the QM market activity to the transaction being adjudicated?
