QUALIFIED MORTGAGE vs. NON-QUALIFIED MORTGAGE

The Dodd-Frank Financial Reform Act theory is to protect the consumer from unscrupulous lending practices among other things. Some of the features of these protections are:

Ability to Repay (A.T.R.):  The ability to repay dictates that lenders are tasked with evidencing the borrowers’ abilities to repay the credit extended to them.  Results of this requirement have expanded credit requirements through increased fees for selected credit scores.  These increased fees are referred to as Loan Level Price Adjustments.  The fees go to FNMA and FHLMC and further burdens borrower’s cash to close.

Another aspect of A.T.R. is a tighter debt-to-income ratio (DTI) requirement (with some exceptions).  The standard for DTI will be capped at 43% of income to debts, principal, interest, taxes, and insurance (PITI) plus revolving debt, any installment debt, alimony, and child support).  Currently, we are still allowed to go above 43% with an automated approval but this exception will be phased out over the next several months to two years.  Eventually, this limitation will force loans that exceed 43% to find alternatives to FNMA, FHLMC, and FHA.  This difference will become known as a Qualified Mortgage as opposed to the future sub-prime mortgages that will be known as Non-Qualified Mortgages.  

Future loans will also be burdened with a Residual Income Test similar to VA qualifying.  These guidelines have not even been written yet.

The intersection of consumer protection, market pricing, and industry will converge at the issue of High Priced Mortgage Loans (HPML).  HPMLs will be the new test for perceived abuse of consumer’s rate and costs.  In testing this new requirement, we are finding that many loans that are smaller in size are more severely impacted (<$125,000) than larger loan sizes.  This is due to multiple characteristics of costs involved being calculated into the rate known as A.P.R.  The theory behind this is to test a loan at lock-in using the current APR shown against the previous week’s national average APR.  

APR is composed of the rate itself plus selected closing costs, which include lender fees and mortgage, default insurance.  The fees are then expressed as part of the rate and added to the rate to produce APR.  The theory of APR is to aid consumers in comparing costs to shop for the best combination of rate and costs.  The practicality of shopping through APRs is a failure in the real world.  The burden placed upon the consumer is then a reduced number of financing options available.  This is especially burdensome for FHA financing.  Again, the alternative to this is non-qualified programs.