Category Archives: Mortgage Rates

The QM (Qualified Mortgage) is here! Bottom Line = Harder to get a loan!

After many long months of waiting, the Consumer Financial Protection Bureau (CFPB) has finally issued its finalized qualified mortgage (QM) rule designed to protect both consumers and responsible lenders.

One of the biggest provisions of the QM rule is the newly set Ability-to-Repay rule, which demands that all new mortgages comply with basic requirements to protect consumers from taking on loans they can’t repay.

The rule does away with so-called “no doc” and “low doc” mortgages, requiring that all of a borrower’s pertinent financial information must be supplied and verified, including: employment status, income and assets, current debt obligations, credit history, and monthly payments on the mortgage, among other information. Based on that information, the lender must be able to make a fair judgment on whether or not the borrower can really take on more debt.

The Ability-to-Repay rule also stipulates that lenders base their evaluation of a consumer’s ability to pay on long-term views, discounting “teaser” or “starter” rates typically used in the introductory period.

CFPB director Richard Cordray explained the Ability-to-Repay rule is a common-sense answer to curb the borrowing and lending behavior that led to the financial crash.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” Cordray said. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”

The rule will go into effect January 2014, according to the CFPB. Exceptions to the rule would apply for consumers trying to refinance from a risky mortgage to a more stable loan.

The CFPB also announced it is considering proposed amendments to the Ability-to-Repay rule. These amendments would, among other things, exempt certain nonprofit creditors that work with low- and moderate-income consumers. They would also provide QM status for certain loans made and held in portfolio by small creditors such as community banks and credit unions. If adopted, the proposed amendments would be finalized this spring and would go into effect at the same time as the Ability-to-Repay rule.

The bureau also announced other features of a QM beyond the Ability-to-Repay criteria. In order to meet QM requirements, a mortgage loan must limit points and fees (including those used to compensate originators) and have no toxic or risky loan features, such as interest-only payments or terms that exceed 30 years.

There is also a 43 percent cap on the acceptable debt-to-income ratio, though there will be a transitional period during which non-qualifying loans that meet other affordability standards will be considered QMs.

In addition, the CFPB explained there are two kinds of QMs that have different protective features for consumers and legal consequences for lenders.

The first kind, QMs with a rebuttable presumption, are higher-priced loans given to consumers with insufficient or weak credit history. Legally speaking, the lenders who give these are presumed to have determined that the borrower has the ability to repay. Consumers can challenge the presumption by proving that they did not actually have the income to repay the mortgage and other living expenses.

The second type of QMs are those that have a safe harbor status—generally lower-priced prime loans given to low-risk consumers. They offer lenders the greatest legal certainty that they are complying with the Ability-to-Repay rule, and consumers can only legally challenge their lender if they believe the loan does not fit the criteria of a QM.

While QM status does not grant a lender complete immunity from borrower challenges, Cordray said in prepared remarks he believes the CFPB has “limited the opportunities for unnecessary litigation” by setting up clear guidelines.

Mike Calhoun, president of the Center for Responsible Lending, said in a response that the new rules “strike a balanced, reasonable approach to mortgage lending—for the most part.”

“But the rules also leave a pivotal issue unresolved: How the fees that lenders pay to mortgage brokers will be counted when it comes to defining a qualified mortgage. The CFPB should not create a loophole that allows high-fee loans to count as a qualified mortgage under Dodd-Frank,” Calhoun said. “If the broker payment issue is appropriately resolved, the rules will be—all in all—good for consumers, investors and the economy.”

Debra Still, chairman of the Mortgage Bankers Association, expressed her own reservations, but said the organization applauds the approach and effort given.

“This is a very complex rule. We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers. In particular, the 3 percent cap on points and fees appears to be overly inclusive as it relates to compensation and affiliates,” Still said.

“Additionally, we will be looking carefully at whether the interest rate threshold for the safe harbor, which is set at 150 basis points above the benchmark rate, will adversely impact too many borrowers,” she continued. “Ultimately, the final verdict on this rule will be made by the market.”

Weekly Market Update

The bond market opened a little better early this morning with slightly weaker stock indexes. The 10 yr note at 1.91% and MBS prices +4/32 (.12 bp) at 8:30. March personal income at 8:30 up 0.4% a little better than forecasts, personal spending though at +0.3% a little softer than thought. On the report treasuries and mortgages didn’t show any reaction. US stock indexes early this morning trading lower, following the markets in Europe.

The DJIA opened -10, NASDAQ -7, S&P -2; the 10 yr note +4/32 1.92% -1 bp and mortgage prices 3/32 (.09 bp) frm Friday’s close.

At 9:45 the April Chicago purchasing mgrs. index, expected at 60.0 frm 62.2 in March; it fell to 56.2. The three components; new orders 57.4 frm 63.3, prices pd at 68.6 frm 70.1 and employment at 58.7 frm 56.3. Overall a weaker report adding to concerns of slowing economy. The weakness is primarily due to inventory levels declining but respondents to the survey also were saying they were looking for a strong summer. The DJIA slipped a little on the report but mortgage prices and the 10 yr note didn’t show much initial reaction.

Treasuries going for their biggest monthly gain since September as slowing U.S. economic growth and concern Europe’s debt crisis is worsening, increased demand for the relative safety of US treasuries. Ten-year notes are slightly higher for a third day with Spain going into its second recession since 2009 and economists said U.S. reports this week will show growth in manufacturing and services slowed. Not only Spain, the UK is in a double-dip recession since the 1970s as its longest peacetime slump for a century persists; UK GDP declined in the last two quarters. The increasingly serious question for Europe is whether the massive austerity cuts demanded have failed to gain support and are for a number of countries unachievable, leading to further deterioration of economies and dragging other global economies down with it. In the US economists predict Labor Department data this week will indicate U.S. hiring increased in April, though not enough to reduce the jobless rate. Consumer spending climbed in March, but a little weaker than estimates. The concern we have for the 10 yr is that it still has not shown the ability to hold under 1.90% on rallies going back to October.

This week may point to a slowdown in manufacturing, services and construction. A gauge of factory activity (ISM manufacturing) will fall to 53.0 from 53.4 in March, according to the median forecasts. An index of services (ISM services sector), the largest part of the economy, will decline to 54.1 from 56.0, while a construction measure will also fall, economists said in separate surveys. A reading above 50 indicates expansion. We won’t put much confidence on the estimates that recently have been more dart tossing than accurate assessments. This week is more about employment than any other report; however the data this weeks has a number of key points.

The 10 yr note is approaching 1.90%, since last October the 10 yr has fallen below it on three occasions but in each case the note was unable to hold under it. Not sure what will occur now but history does have an impact; a sustained decline under 1.90% would embolden traders to push rates lower, the next technical resistance under 1.90% at 1.80%.

Mortgage rates and the Euro debt crisis

As crazy as it sounds, bad news is good news for interest rates. The continued weak economic forecast in Europe is helping keep our mortgage interest rates at historic low levels. The budget issues with Spain, Greece, Italy etc have investors flocking to a “safe haven” and that would be good old US treasuries. Additionally Fed chief Ben Bernanke stated yesterday that the Fed intends to keep interest rates at these low levels through 2014. That is good news for those that have adjustable rate mortgages and home equity lines of credit.