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LIONS AND TIGERS AND BEARS, OH MY!

We all remember that famous quip from a well known production and it’s become a “rallying cry” for business when it seems we are being hit from multiple calamities simultaneously.
Well, here we are… we have been hit with Acronym after acronym of untenable rules and rule changes.
The latest in our never ending world of scary acronymisms (is that a word) comes from QM, QRM, HUD, and the CFPB.
So what’s up in the world of scary mortgage acronyms: Lets see….HUD ( Us Department of Housing and Urban Development) and its FHA program changes (Federal Housing Authority) have passed two pieces of regulatory reform that have 1) put some teeth in the FHA loan programs, and 2) placed a counter- intended consequence on the HUD programs the rules were meant to support. So what am I talking about?

On April 1, 2013 the monthly MIP for FHA insured loan went up yet again. Just a few short yrs ago the monthly MI on a $150,000 home was $68.75 per month. Effective April 1, 2013 that same loan now carries a fee of $168.75. To put that in context, the Principal, Interest and MI portion of a house payment from 2006 til today has increased 13% JUST FROM THE FHA MIP. Doesn’t even consider appreciation or rate increases.

Now lets move forward to June 3, 2013. Here comes the big whammy. Since its inception, the HUD insured FHA program for traditional residential mortgages has had monthly mortgage insurance that would be cancelled at the point the homeowner reached 78% loan to value. This would normally fall somewhere between 75 and 100 months from the start date. Not any more. Effective June 3, 2013 with all future loans, the Monthly will NEVER GO AWAY. So we can now amend that all too famous quote of life’s certainties to include “DEATH, TAXES, and FHA MONTHLY MIP”. Terrible right? Well of course it is. But here is the real plum in all this: HUD primarily enacted this new policy in an effort to solidify its Capital reserve requirements now and in the future. The idea is simple- collect more monthly MIP each month and you will have even more capital to cover the future, unexpected losses of defaulted FHA loans. Well, there is a problem with that.
HUD has long relied on doing a lot of really good loans to help offset the small percentage of loans where they “took a chance” on a borrower who could not obtain traditional, conventional financing. Not any more. What HUD has done is insure that anyone who can obtain a conventional, traditional mortgage will do so at the expense of FHA. In other words, starting June 3, 2013, the only loans that HUD can expect to receive and service will be from clients who didn’t want it, had no choice but to take it and have to keep it and will present a greater % of default, which will further deplete the pool of capital upon which they are trying to replenish.

And what else is new… Well there are two new mortgage related terms or Acronyms that will become much more common in 2013 and beyond. They are……. Drum roll….. QRM and QM..

The Qualified Residential Mortgage or QRM is a method upon which to mitigate risk as brought about by the 2008 Financial crisis. This imperative was address by the Dodd Frank act of 2010
The Dodd-Frank Wall Street Reform Act of 2010 promoted responsible lending by requiring financial firms to retain 5 percent of the credit risk when they sell loans to investors. Prior to 2010, mortgage lenders were not carefully underwriting loans and were then selling loans to investors, knowing that they would not experience any financial loss for problems with the loans once they were transferred elsewhere. The 5 percent credit risk requirement was intended to change this dynamic, forcing financial institutions to take a stake in the loans’ performance, commonly referred to as “skin in the game.” BUT…Financial institutions will be exempt from the 5 percent risk retention requirement on certain types of mortgages, known as Qualified Residential Mortgages . QRMs contain loan terms and practices that the regulators have determined are less likely to end up in default. These regulators have specified a series of risky loan terms and practices that cannot be included in QRMs. Things like prepayment penalties and No DOC or LOW DOC loans as they pertain to borrower income. The agencies have proposed varying down payment requirements of up to 20 percent for inclusion as a QRM. This requirement will effectively disqualify large numbers of lower and middle-income families from buying homes.
So… to paraphrase, QRM was an effort to force lenders to take a more proactive approach in purchasing and later selling mortgage loans. The idea being that if they had to retain 5% of their pool of loans, the lenders would be more diligent. Oh Contrare. This new found, and ever changing definition of a QRM will simply do one thing….. it will STOP lenders and servicers from offering or originating these so called “risky loans”. TO quote… “If you didn’t know, now you know”. QRM will NOT create a more financially prudent market as much as it will simply CUT OFF mortgage options to hundreds of thousands of potential home owners.

This leads us to the next Acronym that is similar but different. THE QM, or Qualified Mortgage is a designation that will be placed on loans that meet certain specs. None of the items by themselves seems overly troublesome but taken together they could have a tremendous impact on the availability of mortgage products. First and foremost the QM designation is not applicable on government sponsored or insured loans like the FHA loans mentioned above. ( But we just spent 3 paragraphs explaining why the average consumer would no longer WANT an FHA loan). Second, the official designations and parameters have yet to be established and are presently being fervently debated.

For example, one proposal for a QM is that the DTI (Debt ratio) is not to exceed 43%. Doesn’t sound so bad does it? But when you note that presently, loans can routinely be originated at up to 49%, that’s a big slice away of potential consumers. But it gets even trickier, the industry method for calculating dti is not always the most straightforward. So be careful. The reason for these rule has been to rein in poor underwriting. I would argue that the poor underwriting has already been corralled, but the caveat here is that loans that meet the guidelines will be granted a “safe harbor”. Well just like QRM above, the concept was to force lenders to have skin in the game. In reality, all that will happen is that lenders will simply NOT originate those loans that fall outside the guidelines.

 

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