The well-known ability-to-repay rule -- which stipulates that lenders must ensure borrowers meet certain lending criteria at the point of origination or face the legal consequences -- goes into effect on Jan. 10, making this week the final countdown to the new housing finance era. Critics say it will kill originations. Not everyone agrees.
The qualified mortgage rule, which identifies the type of loans that are safe from legal scrutiny from an underwriting standpoint, also takes effect Friday, leaving the market a bit uncertain even though many lenders say they’ve had enough time to prepare.
So what should lenders and borrowers expect when the clock hits midnight on the 10?
Some borrowers will definitely take a hit in terms of credit access, but Marcus McCue an executive vice president with Guardian Mortgage, says his company has been focused all along on the types of loans that identify as QM, making this week's transition less impactful for his company.
Guardian also is primarily selling loans off to the GSEs, and the new rules offer some exceptions for Fannie and Freddie loans when it comes to QM’s 43% debt-to-income ratio requirement.
Still, even though a 43% DTI is not always required for GSE loans, McCue admits there’s some ambiguity as to how far those exceptions will ultimately go.
If the system determining eligibility at the GSEs is tweaked along the way, there may be some confusion as to what loans qualify under the QM exceptions and what loans do not, he explains.
For example, there may be a loan approved by the GSEs at 45% DTI, but other factors could end up disqualifying another mortgage with the same DTI if the enterprises factor in additional details the second time around, McCue suggested.
The Guardian executive says, unfortunately, lenders don’t have the decisioning guidelines for the GSEs' qualifying software, so they may find themselves suddenly surprised if adjustments are made or the GSEs begin pulling the strings one way or the other on loans that seem similar on their face.
McCue says Guardian will not be delving into the non-qualified mortgage space, but he does believe there will be some play in that segment. His belief is shared by Jeff Taylor, managing partner of mortgage risk analytics firm Digital Risk.
"In the current credit environment, most of the loans being originated would qualify for QM," Taylor said. But he added, the new environment “draws a hard line in the sand,” and it removes all subjectivity so lenders cannot consider other compensating factors.
As soon as the market settles into the new ability-to-repay era, Taylor expects more opportunistic funds – or hedge funds – to re-enter the space and take a stab at non-QM loans.
It will be up to each fund to determine how much risk they want to take on and where they want to play, Taylor explained. Any of these funds that jump in will address the underlying risks by charging higher interest rates, he added.
"I have heard of several firms that are thinking about it," he told HousingWire. But he said, "Everybody is waiting to see what happens."
Overall, Taylor says the New Year is about compliance and following the black letter of the law.
For McCue, entering 2014 is something his team is prepared for. He is confident in Guardian’s ability to keep the same momentum as last year since the company has always focused on QM. Yet, he admits with new points and fees requirements tacked on this year, some borrowers will have trouble qualifying – albeit, a small percentage of his business.
Some of those potentially impacted include investors in single-family properties, first-time homebuyers and individuals buying condos, he noted.