CFPB Publishes Final Rule on New Mortgage Disclosures

Today the Consumer Financial Protection Bureau issued their Final Rule on integrating disclosures that are currently required by Regulation X (RESPA) and Regulation Z (TILA).  It was back on May 23, 2011 that I wrote an article about the CFPB's effort to remake the mortgage disclosures.  Their name for the campaign was "Know Before You Owe," and it was the first time in my career that I had seen a regulator reach out to the public and industry in such an expansive manor to obtain feedback.

The results of that campaign are in the rule which is available on the CFPB website.  There are some very readable summaries for those of us whose brain begins to ache when reading legal documents.  The CFPB's materials and communication on this issue are commendable. 

There are two new documents which will replace four existing documents.  First is the Loan Disclosure.  The Loan Disclosure will replace the Good Faith Estimate and the initial Truth in Lending Disclosure.  Like the current upfront disclosures, this document must be provided to an applicant within three business days of the loan application.

The other new document is the Closing Disclosure.  This document replaces the HUD-1 Settlement Statement and the Final Truth in Lending disclosure.  The Closing Disclosure must be provided to the applicant no less than three days prior to the loan closing.  There are some additional restrictions about what fees can change prior to closing.  None of the lender's fees, or fees for servicers that the borrower may not shop for can change.  Any increase in APR greater than .125% requires an new Closing Disclosure and another three day waiting period. 

Lenders will need have have a strong process for accurately disclosing in order to make sure that disclosure issues don't arise and cause delays for closing.  They will have plenty of time to prepare as the new rule doesn't go into effect until August 1, 2015. 

Back to a Balanced Market

Buyer’s Market, Seller’s Market, Balanced Market.  At times the circumstances of the real estate market will provide advantages to the buyer, advantages to the seller, or relatively equal advantages to the buyer and seller.

Buyer’s Market

In the aftermath of the financial crisis and bursting of the real estate bubble there was considerable advantages for buyers.  First, there were fewer buyers as many people were negatively impacted by the economy and weren’t in a financial position to purchase a home.  Also, there was excess inventory as the construction of homes had exceeded demand, and a glut of foreclosures added to the homes that needed to be sold.  So the result was a few years of very depressed prices, which combined with low interest rates made the buying opportunity of a lifetime.

Seller’s Market

As folks began to recover from their economic woes, there were more potential buyers in the market.  Low interest rates leveraged their buying power.  Since very few homes had been constructed since the recession, the trends of the market started to reverse.  The growing pool of potential buyers didn’t have enough homes available to fulfill their demand, and prices began to increase.  Sellers found themselves in a good bargaining position and buyers had to compete for homes, resulting in bidding wars.

Balanced Market

The market appears to be in a more balanced position today.  Inventory is more adequate as builders are constructing more homes than they were in prior years.  Sellers’ equity positions have improved with rising prices; putting them in a better position to be able to sell their homes and benefit financially.

Some buyers might complain that prices are higher and they missed out of the great bargains of the recession.  Yes, a buyer could have picked up some great deals in 2010 and 2011, and would be enjoying some substantial value increases today.  But the past is the past.  Unless you have a DeLorean with a flux capacitor you need to live in the present.

The present balanced market is good for homebuyers.  They have more homes to choose from than they did just a year ago, and the bidding wars that took place in the seller’s market are much less frequent.  Buyers also are enjoying the extra buying power that comes with very low interest rates.  A 1% increase in rate equates to an increase in price (based on relative payment) of 10% to 13%.  So today’s rate environment is like a blue light special on houses.

Today’s potential buyers shouldn’t be frustrated that home prices have increased.  They are still well below the highs of the last decade.  There are more homes to choose from, and low fixed interest rates give homebuyers tremendous purchasing power.

Impact of “Qualified Mortgage” Rule on Homebuyers

 

The Dodd-Frank Wall Street Reform Act of 2010 requires the creation and implementation of 398 rules.  That is quite a hefty meal for lenders to digest.  As of September 2013, only 160 of those rules (slightly over 40%) have been finalized.  There are a couple of those rules going into effect on January 10, 2014 as a result of Dodd-Frank that are impactful to homebuyers.  

 

The mortgage industry already felt the effect of a number of rules from this law, but there are more rules coming soon, and those won't be the last either.  The Act requires that lenders “must make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms.”  It also establishes a “Safe Harbor” and presumption of compliance for a certain category called “Qualified Mortgages.”  Of course the lending industry should make sure borrowers can repay the loan.  That is common sense, and the way the industry has operated since “no doc” loans went extinct over five years ago.  The law and accompanying regulations have the purpose of ensuring that those risky loans don’t come back to life.  So what is really changing on January 10?  Basically, lenders have to document that loans meet the characteristics of “Qualified Mortgages” if they want to be protected from litigation.

 

Mortgage firms are working tirelessly on implementing plans to be compliant ahead of the January 10 deadline.  This includes integrating new technology into the process, fine-tuning processes to ensure only compliant loans are originated, updating documents, and modifying or potentially eliminating loan products that will not meet QM rules.

 

Qualified Mortgages (QM)

Under the QM Rules, loans generally cannot contain risky features (i.e., interest only, negative amortization or balloon payments), and the loan term cannot exceed 30 years. Points and fees are limited to 3% for loans of $100,000 or more (higher thresholds are permitted for loans below $100,000). In addition, for most QM loans, Debt-to-Income (DTI) ratio is limited to 43%. The max DTI does not apply to Fannie, Freddie, FHA, VA, or USDA eligible loans that have a valid automated underwriting system approval.  There is no minimum down payment requirement for QM.  Within QM is a requirement that the lender make certain the borrower has the ability to repay the loan.

 

Ability to Repay (ATR) 

ATR focuses on underwriting practices and requires lenders to consider a borrower’s ability to repay the mortgage before extending credit to the borrower. The ATR Rule establishes minimum standards (eight specific factors) for lenders to use in determining whether consumers have the ability to repay the mortgage. Loans that meet the QM standard (discussed above) are presumed to be compliant with the ATR Rule. Non-QM loans can still meet the ATR Rule standards, but must be separately underwritten with the specific ATR factors in mind.

 

Safe Harbor

QM loans that are not “higher-priced” under the Rule have a “safe harbor.” This means that these loans are conclusively presumed to comply with the ATR requirements.  Higher-priced loans that meet the QM criteria are also presumed to be compliant with the ATR Rule; however, a consumer may rebut this presumption in a lawsuit. A first-lien mortgage loan is considered “higher-priced” if the APR is 1.5 percentage points or more over the Average Prime Offer Rate

(APOR). This “safe harbor” provides some added level of legal protection for lenders defending ability to repay lawsuits. 

 

Here are some areas of potential impact:

• Programs with "risky features" such as interest only, balloon payments, and terms longer than 30 years will not meet the QM rule.
• Mortgage brokers will have a harder time meeting the max 3% points and fees as the broker compensation is included in the calculation.  Mortgage brokers will find it harder to compete and be profitable with this new rule.
• Upfront Mortgage Insurance (MI) on conforming loans is included in the max 3% points and fees calculation unless it is refundable.  Refundable MI policies will carry a higher premium than non-refundable policies.  Still any amount of the refundable premium that is above the FHA upfront premium must be included in the calculation.
• For Adjustable Rate Mortgage (ARM) products, the 43% maximum debt-to-income ratio (DTI) is calculated based on the highest possible rate in the first 5 years of the term.
• Allowing Fannie & Freddie loans to exceed the max 43% DTI with a valid AUS approval only applies while the GSE's are under conservatorship of the Federal government.  The good news is that they will likely stay in control of the government for at least several years as there is no clear plan to wind them down.

In principal the concept of documenting a borrower’s ability to repay a loan was already addressed by the market over five years ago.  Lenders with any memory of the financial crisis are not going to offer “no doc” loan products again; however, the law is designed to ensure that lenders can’t offer them ever again.  Lenders will want the majority, if not all, of their loans to fall into the “safe harbor.”  This will lead to a greater workload that burdens lenders, but it should have minimal impact on consumers’ ability to obtain a home loan.

Mortgage Insurance Tax Deduction Out

In the process of haggling over a 2 month extension of the payroll tax reduction (which is increasing mortgage rates, see my Dec 30, 2011 posting), Congress failed to extend a number of existing tax deductions. One of those deductions that is no longer in effect is the deduction for mortgage insurance.

When a home buyer puts less than 20% as a down payment, they have to pay a mortgage insurance premium. Mortgage insurance is a policy that pays the lender a claim in the event a borrower defaults on the loan. Up until midnight on New Years Eve, that premium was tax deductible.

Congress may extend the deduction and make it retroactive to the beginning of the year. But many of the tax deductions are considered bad policy by tax experts and may not be in favor. So for the time being, mortgage insurance is not a tax deduction.

Payroll Tax Cut Paid for with Higher Mortgage Rates

The Temporary Payroll Tax Cut Continuation Act of 2011 was signed into law earlier this month. At the time it was passed we knew it was going to be financed with higher guaranty fees from Fannie Mae & Freddit Mac. These G-Fees are built into the price or interest rate of a new home loan. Today, Fannie Mae announced that they are raising their G-Fees by 10 basis points (0.1%) beginning April 1.

What this means for those looking to finance the purchase of a home, or refinancing, is that they will pay about 0.1% higher in interest rate than they otherwise would have. Lenders' rates will be impacted a couple months in advance of the April 1 start date.

So a payroll tax cut is paid for by what amounts to a mortgage tax for new homeowners and those that refinance their existing home loans.

Too Difficult to do Mortgages in Massachusetts

I just received this notice from GMAC who is one of the investors that we sell mortgages to.

"GMAC Bank (GMACB) Correspondent Funding Approved Correspondent Clients
please note that effective Tuesday, December 6, 2011, GMACB will no longer
accept new locks for properties located in the Commonwealth of Massachusetts.
This change is necessary due to the complexity of transacting business in an
increasingly difficult legal environment in Massachusetts."

Politicians in Massachusetts and other states need to understand that overly burdensome legislation and regulation on banks and mortgage companies will ultimately hurt the people for whom they are there to serve.

HARP Part Deux

Refinance to a lower interest rate, even if you are infinitely underwater on your mortgage. As long as the homeowner has continued to make the payment on time, this is part of the newly enhanced Home Affordable Refinance Program. The previous guidelines limited loan amounts on HARP refinances to 125% of the current appraised value. Removing that guideline opens the door to many homeowners that owe significantly more than their property is worth.

Here are some important points about the program:

• Mortgage must currently be owned by Fannie Mae or Freddie Mac
• Mortgages must have been acquired by Fannie or Freddie prior to May 31, 2009
• Fannie & Freddie roll out the new guidelines on December 1, but it will take lenders a couple of months to implement the program.
• Program ends December 31, 2013.

Please contact me directly with questions related to refinancing under HARP. cmozilo@homeownersfg.com