TheMReport — News and strategies for the evolving mortgage marketplace.
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quity Loans Feature Economy Class When the CFPB rolled out a glut of new regulatory requirements to start the new year, one key component was notably missing: down payment standards. Today, executives are weighing in on the policy delay and potential industry impact of what's widely considered the most crucial element of the QM and QRM rules. By Bob Calandra I f mortgage lenders look a little blue in the face, it could be because the entire industry is holding its collective breath waiting for the Consumer Financial Protection Bureau's (CFPB) new rules on the minimum down payment a borrower must make to qualify for a mortgage. In January, the CFPB released its long-awaited qualified mortgage (QM) standards for residential real estate lending that are expected to go into effect next year. Left unanswered by the CFPB, however, is just how much borrowers must have in a down payment, which will be part of the new qualified residential mortgage (QRM) rules. The as-yet unreleased QRM rules will also mandate the percentage of risk lenders must retain from the mortgages they write. Of those two issues, lenders are most concerned about the borrower's down payment. If it is 20 percent as suggested in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the 2010 financial reform legislation that created the CFPB, lenders fear it will eliminate large swaths of potential homebuyers. And that would almost certainly force some mortgage lenders out of business. "There are very few borrowers nowadays that can actually afford the 20 percent when purchasing a property," said Robert Oleynick, chief compliance officer for Equity Loans, a residential mortgage company with offices in 30 states. "By issuing a stringent down payment requirement such as 20 percent, it is going to destroy the conventional part of this business. In all sincerity, I'm hoping, and I believe everyone else in the industry is hoping, that the down payment rule never goes into effect." Chances of the rule never being implemented are probably as unrealistic as some of the no-doc loans written between 2006 and 2008. Almost everyone agrees that the CFPB will require borrowers to have some skin in the game, most likely more than the Federal Housing Administration's 3.5 percent but lower than Dodd-Frank's 20 percent. That's actually good news because it shows CFPB's flexibility in considering today's down market conditions. But until the CFPB releases its QRM regulations—and with it the percentage a homebuyer must ante up, a minimum FICO score, and the borrower's length of employment—there is little mortgage lenders can do but speculate and hope for the best. "When there are unknowns, you can have contingency plans," said Josh Moffitt, president of Silverton Mortgage Specialists, a regional mortgage lender based in Atlanta. "Smart lenders will make sure they have policies and procedures in place and are underwriting good loans. Will there be a market share to go after? Will CFPB's [decision] devastate the housing market? We don't know. But we believe people are still going to want to buy houses." New Rules T he CFPB's newly released QM rules are specifically aimed at the lending practices that help inflate the housing bubble that eventually led to the mortgage crisis. Gone are interest-only loans used in jumbo loans and some adjustable- rate mortgages. Also axed are negative-amortization loans and loans longer than 30 years. And to receive QM approval, a borrower's debt-to-income ratio can be no higher than 43 percent. "I was expecting them to come out with an industry standard of 38 to 40 percent debtto-income ratio," Oleynick said. "For CFPB to allow it to go to 43 percent debt-to-income means they are starting to relax some of the initial requirements they were going to set forth." Under the CFPB regulations, lenders writing loans that meet QM criteria are given "safe haven" protection against borrowers bringing lawsuits claiming an inability to repay. Community banks that fail to meet QM standards but apply their own strict regulations may also be protected. If a loan doesn't meet the technical QM standards but is still purchased by FMNA, FHA, FHLMC, or other government agencies, it still will have safe haven protection. Loans that don't meet QM criteria and aren't purchased by any government agency fall into something called "rebuttable presumption," which allows borrowers to fight foreclosure for various reasons. "Having uniform standards to follow is actually helpful to The M Report | 31