QM storm could hit in weeks
Lawmakers scramble to set baseline, everyone wants more flexibility
The Consumer Financial Protection Board’s Qualified Mortgage (QM) rule is going to constrict access to mortgage credit and possibly stall housing, and members of Congress and mortgage industry leaders want a lot more flexibility in dealing with the CFPB’s regulations that went into effect Jan. 10.
That was the word from the House Financial Services Committee’s subcommittee on Financial Institutions and Consumer Credit’s hearing on Tuesday.
Subcommittee Chair Rep. Shelley Moore Capito (R-WV) said that legislators want to establish what to watch for over the coming months so that they can take action sooner rather than later, in case some of the worst predictions come intto fruition.
“We want to establish a baseline at the start to know what the effects will be. Anecdotally we’re hearing a lot of what might happen. We want to know what regulators should be looking for,” Capito told HousingWire Tuesday morning. With QM being defined the way it is, Capito is concerned lenders won’t write mortgages for those who fall outside the line – especially those in the 'low middle-income' range. "With that flexibility gone there are people who won’t qualify," she says.
Under QM, loans in the system must require periodic payments without risky features. In addition, they cannot have terms exceeding 30 years, must be insured by FHA or HUD and have to limit upfront points and fees to no more than 3% with some exceptions for certain types of loans. The rule designates loans insured under these programs as Safe Harbor Qualified Mortgages regardless of upfront points/fees and APR to APOR ratio so as not to interfere with current lending practices until appropriate parameters can be determined.
In particular, the ability-to-repay rules such as the cap of 43% debt-to-income ratio have given rise to ongoing concerns on the Hill and in the market. Capito said that she expects there may be a push for modifications sooner rather than later.
"Initially I thought we’d have a great picture of what the effect will be in six months, but bankers I’ve talked to say in two or three months we’ll know what the effect will be," she said.
Subcommittee members expressed varying degrees of concern that QM regulations are too broad, and that it could hurt home buyers and a fragile housing recovery.
"The exemption for Fannie and Freddie and other GSEs is for four years, a blanket protection, which tells me the CFPB and others consider that this will be a rough rollout, and the mortgage market will shrink," Capito said. "If we take away the flexibility for those who fall outside the regulations, it will impact those in rural areas, and the flexibility for institutions to work out what kind of pricing and what kind of risk is acceptable to community banks and small lenders."
Daniel Weickenand, CEO of Orion FCU, testified Tuesday on behalf of the National Association of Federal Credit Unions, and spoke to those concerns.
"NAFCU generally supports efforts to ensure that consumers are not placed into mortgages they cannot afford,” Weickenand said. “While we have a positive relationship with the CFPB, and have weighed in on this issue repeatedly, we maintain concerns about the Qualified Mortgage (QM) standard that has been developed. We are concerned that this rule will potentially reduce access to credit and hamper the ability of credit unions to continue to meet their member’s needs. As you know, the compliance deadline for the ability-to-repay rule outlining the QM standard just passed on Friday, January 10, 2014.”
"Unfortunately, a number of mortgage products sought by credit union members, and offered by credit unions, may disappear from the market as they are non-QM loans. For example, a forty-year mortgage loan cannot be a QM because it exceeds the maximum loan term for QMs," he said. "This has been a product sought by credit union members in high-cost areas as it can help lower the monthly mortgage payment. While credit unions can still originate forty-year mortgages, since the special legal protections for meeting the ability-to-repay requirements will not be extended, many may cease to do so."
Similarly, because of a problematic definition, Weickenand said that a number of credit unions make mortgage loans with points and fees greater than 3% because of their relationships with affiliates and because they can leverage those relationships to get the best deal for their members. Those mortgages will also not receive QM status, which could mean higher costs down the line for credit union members.
NAFCU and others want Congress to act to ease some of the restrictions.
"Congressional action to provide relief on some of the QM standards would help alleviate some of the problems and allow the spigot of mortgage credit to continue to flow to many Americans. Furthermore, Congressional action on regulatory relief would help ease the growing burdens associated with new compliance standards," Weickenand told the subcommittee.
Jack Hartings, CEO of Peoples Bank in Coldwater, Ohio, also testified on behalf of the Independent Community Bankers of America, and Quicken Loans CEO Bill Emerson spoke on behalf of the Mortgage Bankers Association.
HFSC Chair Jeb Hensarling, R-TX, has been a longtime critic of the QM rule, and he has spent the past few years pushing back against that and other aspects of the Dodd-Frank Act, saying that these regulations force lenders to tighten the lending spigots, even for the safest of borrowers and that keeping GSEs in a preferred position keeps out private capital, which would be a better regulator of lending standards.