Economists' Outlook

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Planning Done: Measuring the QM Rule’s Impact

The qualified mortgage (QM) rule was implemented in January of 2014. It is the first of two rules that came from the Dodd–Frank Wall Street Reform and Consumer Protection Act that will impact the housing market. This law is intended to protect consumers by strengthening underwriting standards, but some have argued that the rules will raise costs and reduce access for consumers. To gain insight on the impact of the new law, NAR Research surveyed a sample of lenders with questions about the impact of the lending on their business and how the rule could in turn impact consumers.

On Friday, January 10th, 2014, the requirements of the ability to repay and qualified mortgage (QM) rule went into effect. The Dodd-Frank act requires that originators make a good faith effort to verify a borrower’s ability to repay (ATR) their mortgage and imposes stiff penalties if they do not. The QM rule allows for varying degrees of assumed compliance with the ability to repay rule, which is advantageous to lenders as it allows them to minimize and to budget for potential penalties and litigation expenses. All mortgage applications received on or after January 10th are required to comply with the QM rule which includes full documentation of income, assets and employment, a maximum of 3% for points and fees, a cap of 43% on the back-end debt-to-income ratio, and limitations on the type of mortgage products that qualify and prepayment penalties among other requirements.

Here are some highlights from the survey:

  • When asked about the extent of the QM rule’s impact, 55% of survey respondents indicated that the QM rule would affect 2.6% to 20% of their originations.
  • The 3% cap on points and fees was the feature of the new rule that most concerned respondents as 60% indicated that they were “very concerned”.
  • A strong majority of respondents indicated that they would defer to investors preferences on how to treat non-QM loans, but 45% indicated that they would not originate non-QM mortgages.
  • Roughly a fifth of respondents did not know whether or not they would charge non-QM borrowers higher rates, but the most frequently cited change for prime and near-prime borrowers was an increase of 50 to 75 basis points and 150 basis points for sub-prime.
  • Relative to 2013, respondents indicated a high reluctance to originate mortgages with non-QM features and their aversion toward originating non-QM loans increased as credit scores declined. They also indicated an elevated reticence to originate mortgages that fit into the rebuttable presumption definition of the QM rule and even some hesitance to originate safe harbor QM mortgages.
  • A significant share of respondents indicated that they would impose buffers in advance of the 43% back-end debt-to-income ratio, the 3% cap on points and fees, and the limitation on the annual percentage rate to within 150 basis points over the average prime offer for eligibility with the safe harbor definition of the QM.
  • In response to the new rule, the vast majority of respondents plan to increase staff and expenditures on compliance software. In addition, 11% will shutter affiliated title insurance or other companies.
  • Finally, 16.7% of respondents indicated that they had already adapted to the rule, while 44.4% would be ready within three months. Nearly a third of respondents indicated that it would take three to six months before they had adapted, but all would be ready within one year.

What does this change mean for REALTORS and consumers? Consumers should expect to have to document their income, employment and resources. If your client has a high debt-to-income ratio, the FHA as well as Fannie Mae and Freddie Mac will be more lenient than private financers. However, if your client falls under one of the other aspects of the non-QM space or even the rebuttable presumption portion of the QM space (e.g. high fees, subprime, interest only, etc.) your client might require help finding a specialty lender. Consider finding a few lenders who specialize in financing these special cases at affordable rates so that you can meet your client’s needs if the time comes.
For the full survey, click here.

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