New Universal Mortgage Guidelines About To Be Implemented

By Jeff Magee

Greetings Friends, Clients and Associates.

The big news in the Mortgage Universe is the looming implementation of the Dodd-Frank inspired Qualified Mortgage and Qualified Residential Mortgage. In just a little over a month, the US Government, through it’s Consumer Financial Protection Bureau, will be the de facto arbiter of who gets a mortgage loan with the best terms going forward.  It’s not that banks will not be free to lend to anyone they want to after January 10, but the risks inherent in making a mortgage loan that is outside the underwriting criteria of the QM are so great that few if any banks will even attempt it.

Fortunately, Mortgage Resource Group has always adhered to sensible and ethical lending practices, and we estimate that 80% of the loans we originate already conform to the upcoming Qualified Mortgage definitions.  The one area of concern for some of our clients will be the new debt ratio ceiling which is to be pegged at 43%.

Mark Greene describes the issue very well in his article “The Great Qualified Mortgage Yawn”.  Excerpts follow.    

“Enter the great debt ratio argument.  The CFPB (Consumer Financial Protection Bureau) through the new QM and QRM underwriting guidelines, have decided that the absolute maximum debt ratio for any borrower should not exceed 43%.  That means that the proposed mortgage payment, including real estate taxes, homeowner’s insurance, mortgage insurance and if applicable, common area fees (Homeowner’s Association Fees, Maintenance Fees, Co-op fees, etc.), along with all other recurring monthly consumer debt (auto loans/leases, student loans, alimony/support payments, personal loans, credit card payments, etc.), cannot exceed 43% of a borrower’s gross monthly income.

This absolute is proposed as the be all/end all cure supported by statistical analysis and default probabilities, and properly administered will bring order to chaos in the mortgage lending world.  If we as lenders use the 43% debt ratio cutoff, we will substantially reduce the risk of loan defaults, buybacks, foreclosures and all of the ills that have brought about much needed reform in the mortgage lending industry.  So says the CFPB.

This would seem reasonable and prudent, after all, why in the world would a lender allow a borrower to be so burdened with debt service that almost half of their income evaporates before they even get paid? But financial profiles are fluid, debts get paid off, incomes change, households change, often times one month is financially substantially different than another; individual cash flow management practices are as varied as DNA fingerprints.  Attaching the 43% debt ratio ceiling to every mortgage lending request is akin to putting a 55 mile per hour speed limiting device on every car on the road, it may save some lives, but it is a narrow solution to a broader issue.

The broader mortgage industry issues are responsible lending, successful homeowners, lower default and foreclosure rates and stable homeownership trends.  Imposing a hard 43% debt ratio cap is not the transformative magic wand that will accomplish these goals…… 

There is one nagging little issue that the CFPB framers of QM AND QRM seem to be dismissing as less than material.  Estimates ranges from 18% to 22% of all mortgage approvals have debt ratios above 43%.” 

I agree with Mr Greene.  A “hard” debt ratio of 43% will penalize otherwise credit worthy borrowers.  Aggravating the problem is the fact that calculation of acceptable income is not particularly standardized.  Ten underwriters could look at a borrower’s income tax return and come up with ten different “incomes”.  The same holds true to some degree with calculating accurately “debt”.  I can envision the aggravation in all our futures, as we have to explain to Joe Borrower that his $400,000 loan is “approved”, providing he pay off and cancel his $500 Discover Card to get the debt ratio to 43%…..and never mind about the $600,000 in the savings account.  That is immaterial where the debt ratio is concerned!

Alas, the mortgage and home finance industry will survive.  It has to.  Home ownership is practically a fundamental human right!  Hopefully the pendulum of underwriting will not swing too far to the extreme away from the Common Sense middle.

For those of you contemplating a refinance or purchase right now, you may be glad you got your application in process before Dec 31st to avoid any unpleasant surprises.