What is a QM Loan
What is a QM Loan? If you’ve read our prior posts or read in more detail Winning Mortgage, Winning Home, a Qualifying Mortgage is one which has to meet a number of tests concerning underwriting, pricing and Ability to Repay (ATR). Why is this important?
Lenders prefer to write QM loans because they are easy to sell and they provide many protections against lawsuits and claims of predatory pricing or lending. The term arose from the 2008 foreclosure crisis where the federal government through Fannie Mae and Freddie promoted lax standards. They promoted making mortgages to borrowers who generally wouldn’t qualify in order to pocket more profits. Some unscrupulous mortgage brokers took advantage by making mortgages with very high interest rates to subprime borrowers.
However, the key is that the federal government through Fannie Mae and Freddie Mac made those policies and deliberately ignored unscrupulous practices in the name of profit. Here’s a hint--the government pushing borrowers to get into houses they can’t afford isn’t going to end well. Politics again trumped common sense. At the time, the boards of directors of Fannie Mae and Freddie Mac had deep ties to Bill and Hillary Clinton. But George Bush and his allies also wanted a robust housing market.
When is a QM Loan not a QM Loan?
Enter the QM Mortgage. Lenders wanted to know how to protect themselves from lawsuits, frivolous accusations and punitive regulatory actions. As we all know, government and regulators are great at identifying a problem well after it has exploded and can no longer be ignored. Then it acts to punish all the law abiding participants with harsh rules and reactions. Few bad apples seem to get punished. 2008 proved there were bad apples, but many were following what the government told them to do. Here’s a second hint–following government recommendations and policies is not a defense against later government punishment. Now we have one government bureaucracy (CFPB) issuing conflicting and contradictory policies with another government bureaucracy (Treasury-who controls Fannie and Freddie).
Until recently, a loan which was eligible to be sold to Fannie Mae or Freddie Mac came blessed with a QM tag. However, despite long, long work with the CFPB by the mortgage industry, the CFPB punted on actually implemening a QM rule which gave a real definition to QM. CFPB blew up the proposal with a decision to postpone any final rule until October 2022, leaving lenders still in the dark as to a real rule.
Enter the Treasury department which in March 2021 changed the terms under which Fannie Mae and Freddie Mac could buy mortgages. No longer would loans going to Fannie Mae and Freddie Mac automatically get QM protection. On April 9, Fannie and Freddie issued new guidance. For any application after July 1, 2021 and not closed by August 31, 2021, the guidelines previously in place would not serve to allow Fannie Mae and Freddie Mac to purchase these mortgages and make them QM. Voila, many previously QM mortgages are no longer QM mortgages.
Changing Standards
When the two gorillas on the block in buying mortgages now have a different standard, expect some real fall out in the lending area. What will change in the loans Fannie and Freddie buy? What will happen to pricing on loans they can no longer buy?
Here’s a third hint–rates stay low much due to the low rates from Fannie Mae and Freddie Mac. Does the 45% DTI Fannie and Freddie were willing to underwrite and approve fall to 43% as a new benchmark? Lower? If the interest rate is capped for a poor credit borrower and there is no one to buy the loan or willing to lend at that rate cap, where does the borrower go to get the loan? Remember, the poorer the credit, DTI and LTV, the higher the risk to a lender and the higher the price has to be to take that risk. If a borrower has proven that repayment is iffy, why make a loan to that borrower at all?
The FHFA, CFPB, Fannie Mae and Freddie Mac have changed the rules time and time again over the past year. They have issued rules and backtracked. Now they are moving to punish mortgage servicers for not being lenient enough on borrowers not paying their mortgage. Mortgage lenders and servicers will see a number of enforcement actions from these entities rule of the month club approach.