Jan. 10, 2013: Mortgage jobs; AIG drops lawsuit; QM: much ado about nothing? The industry hopes so - links to the nitty-gritty details
Rob Chrisman

After going through the process of considering joining the well-publicized lawsuit, AIG, parent of United Guarantee, has dropped that plan. According to most sources, AIG had no choice but to consider it but by no means was the decision not to join due to anger from congress and the American People. One article noted, “AIG said its board had carried out its legal and fiduciary duty to consider joining Greenberg's lawsuit before making its decision. Greenberg has a case pending in the Court of Federal Claims in Washington, D.C., and is also appealing the dismissal of a lawsuit in the federal court in New York. AIG said it would not pursue Starr's claims nor would it allow Starr to pursue them on AIG's behalf, setting the stage for a fresh legal fight between Greenberg and the company.” AIG has paid back the entire bailout of $182 billion plus almost $23 billion in profit – not a bad return for the taxpayer. Here is more: http://www.cbsnews.com/8301-34227_162-57563093/aig-wont-join-$25b-lawsuit-against-u.s-government/.

Turning to another large firm, the Partnership Channel of the retail mortgage division of Citibank is currently recruiting Loan Originators and Sales Managers in the following states: TX, LA, MO, IA, IN, OK, TN, KS, WI, AL, MN, KY, MI, & IL. Citibank is a nationally recognized lender that has experienced phenomenal growth and is focused on continuing to expand its national footprint in 2013, and its Retail Mortgage Partnership Channel focuses on the formation of real estate and builder partnerships, generation of purchase mortgage volume, and effective cross-sell routines. The channel’s unique approach redefines the traditional boundaries of the home purchase mortgage with the industry’s realtors and builders. Experienced candidates who are proven leaders in the mortgage industry and have experience in both operational and sales processes should submit confidential resumes and qualifications to Citibank Recruiter Kenda Rice at kenda.l.rice@citi.com.

As I have aged, it seems I become confused more easily. Take yesterday afternoon, for example. Did or didn’t the CFPB release QM information? Did investors and regional mortgage groups send the information out to their members, or didn’t they? Regardless, it seems that QM is “much ado about nothing.” And underwriters and loan officers who became accustomed to guidelines and policies changing at a moment’s notice will be relieved to hear that these changes* won’t take affect until one year from now. (* “Changes” might be an exaggeration – many if not most reputable lenders are already offering home loans based on these criteria, and thus will take this in stride. As one grizzled mortgage vet told me yesterday, “We really dodged a bullet on this one.”)

The QM definition appears to leave plenty of room for exceptions. Notably, the final rule provides a safe harbor for loans that satisfy the QM definition and are not "high priced", though it does provide a rebuttable presumption for higher priced loans. The final rule also allows for a second, temporary QM with more flexible underwriting requirements for GSE loans (while they operate in conservatorship) and FHA/VA loans - the CFPB appears wary of adversely impacting the mortgage market. The CFPB is seeking comments on several aspects of the rule before it is finalized this spring.

Remember that this all springs from the Dodd-Frank Act that includes provisions that require creditors to determine whether the consumer has the ability to repay their mortgage. Under the Act, a creditor can assume that the borrower has met the ability-to-repay requirement if the loan is deemed a QM. The QM definition is important for two reasons: 1) mortgage originators are unlikely to originate mortgages that do not qualify as a QM; and 2) the Qualified Residential Mortgage (QRM) definition can be no broader than QM.

Per the final rule, creditors must generally consider the following factors in determining ability-to-repay (though the rule does provide specific underwriting criteria): 1) current income or assets; 2) current employment status; 3) credit history; 4) monthly mortgage payment; 5) monthly payments on any other loans associated with the property; 6) the monthly payment for other related obligations (i.e. property taxes); 7) other debt obligations; and 8) monthly debt-to-income ratio the borrower would be taking on with the mortgage.

Generally, QM requirements prohibit loans with negative amortization, IO loans, balloon payments, loans with terms greater than 30 years, and loans in which the points and fees are greater than 3% of the loan amount. (Most IO production now seems to be in the ultra-prime jumbo area – watch for some grousing from jumbo lenders.) The general QM rule requires the consumer to have a debt-to-income (DTI) ratio less than 43%, in line with FHA standards.

But wait – there’s more! Nothing is simple anymore, and the final rule provides for a second, “temporary” QM category that allows for more flexible underwriting requirements. The release notes that this exemption is driven by the "fragile state of the mortgage market" and the fact that in many cases borrowers can afford a DTI ratio above 43%. To qualify under the temporary QM definition, a mortgage must meet the general product feature requirements and be eligible to be purchased or guaranteed by either the GSEs (while in conservatorship), the FHA, VA, or Department of Agriculture or Rural Housing Service. Hey, no one wants to be accused to hurting our “fragile” housing market, right?

Since there is a not a whole lot going on otherwise, here is more information on this very important set of rules:

Today the Consumer Financial Protection Bureau (CFPB) adopted a new rule that will protect consumers from irresponsible mortgage lending by requiring lenders to ensure prospective buyers have the ability to repay their mortgage. The rule also protects borrowers from risky lending practices such as “no doc” and “interest only” features that contributed to many homeowners ending up in delinquency and foreclosure after the 2008 housing collapse.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said CFPB Director Richard Cordray. “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.”

Leading up to the mortgage crisis, certain lenders originated mortgages to consumers without considering their ability to repay the loans. The gradual deterioration in underwriting standards led to dramatic increases in mortgage delinquencies and rates of foreclosures. What followed was the collapse of the housing market in 2008 and the subsequent financial crisis. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act created broad-based changes to how creditors make loans and included new ability-to-repay requirements, which the CFPB is charged with implementing.

Under the Ability-to-Repay rule announced today, all new mortgages must comply with basic requirements that protect consumers from taking on loans they don’t have the financial means to pay back. Among the features of the new rule:

Financial information has to be supplied and verified: Lenders must look at a consumer’s financial information. A lender generally must document: a borrower’s employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations. This means that lenders can no longer offer no-doc, low-doc loans, where lenders made quick sales by not requiring documentation, then offloaded these risky mortgages by selling them to investors.

A borrower has to have sufficient assets or income to pay back the loan: Lenders must evaluate and conclude that the borrower can repay the loan. For example, lenders may look at the consumer’s debt-to-income ratio – their total monthly debt divided by their total monthly gross income. Knowing how much money a consumer earns and is expected to earn, and knowing how much they already owe, helps a lender determine how much more debt a consumer can take on.

Teaser rates can no longer mask the true cost of a mortgage: Lenders can’t base their evaluation of a consumer’s ability to repay on teaser rates. Lenders will have to determine the consumer’s ability to repay both the principal and the interest over the long term − not just during an introductory period when the rate may be lower.

Qualified Mortgages

Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue “Qualified Mortgages.” These loans must meet certain requirements which prohibit or limit the risky features that harmed consumers in the recent mortgage crisis. If a lender complies with the clear criteria of a Qualified Mortgage, consumers will have greater assurance that they can pay back the loan. Among the features of a Qualified Mortgage:

No excess upfront points and fees: A Qualified Mortgage limits points and fees including those used to compensate loan originators, such as loan officers and brokers. When lenders tack on excessive points and fees to the origination costs, consumers end up paying a lot more than planned.

No toxic loan features: A Qualified Mortgage cannot have risky loan features, such as terms that exceed 30 years, interest-only payments, or negative-amortization payments where the principal amount increases. In the lead up to the crisis, too many consumers took on risky loans that they didn’t understand. They didn’t realize their debt or payments could increase, or that they weren’t building any equity in the home.

Cap on how much income can go toward debt: Qualified Mortgages generally will be provided to people who have debt-to-income ratios less than or equal to 43 percent. This requirement helps ensure consumers are only getting what they can likely afford. Before the crisis, many consumers took on mortgages that raised their debt levels so high that it was nearly impossible for them to repay the mortgage considering all their financial obligations. For a temporary, transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards − such as that they are eligible for purchase by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) − will be considered Qualified Mortgages.

There are two kinds of Qualified Mortgages that have different protective features for a consumer and different legal consequences for the lender. The first, Qualified Mortgages with a rebuttable presumption, are higher-priced loans. These loans are generally given to consumers with insufficient or weak credit history. Legally, lenders that offer these loans are presumed to have determined that the borrower had an ability to repay the loan. Consumers can challenge that presumption, though, by proving that they did not, in fact, have sufficient income to pay the mortgage and their other living expenses.

The second, Qualified Mortgages that have a safe harbor status, are generally lower-priced loans. They are generally prime loans that are given to consumers who are considered to be less risky. They will also offer lenders the greatest legal certainty that they are complying with the new Ability-to-Repay rule. Consumers can legally challenge their lender if they believe the loan does not meet the definition of a Qualified Mortgage.

The Ability-to-Repay rule does not affect the rights of a consumer to challenge a lender for violating any other federal consumer protection laws.

Today, the CFPB is also releasing proposed amendments to its Ability-to-Repay rule. These amendments would, among other things, exempt certain nonprofit creditors that work with low- and moderate-income consumers. The proposed amendments would also make exceptions for certain homeownership stabilization programs − such as those that offer loans made in connection with the Making Home Affordable program − which help consumers avoid foreclosure. The proposed amendments would also provide Qualified Mortgage status for certain loans made and held in portfolio by small creditors, such as community banks and credit unions. Finally, today’s proposed amendments invite comment on how to calculate loan origination compensation under the points and fees provision of Qualified Mortgages.

The rule and proposed amendments are at: http://www.consumerfinance.gov/regulations.

A factsheet further explaining the new rule is at: http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-factsheet.pdf.

A summary of the final Ability-to-Repay rule is at: http://files.consumerfinance.gov/f/201301_cfpb_ability-to-repay-summary.pdf.

The information above is much more interesting than the markets, which have had none of the usual news upon which to trade. Wednesday, however, we did see a slight improvement, and some lenders issued improved rates. Thomson Reuters noted, “Prices on 30-year FNMA MBS ranged from flat on 4.0s to +4+ ticks on 3.0s, while higher coupons declined between 1 tick and 2+ ticks. 10-year notes held in positive territory at +4+/32nds (1.86%) despite a mediocre 10-year note auction (re-opened) and slight gains in equities.”

As for economic news, Initial Jobless Claims for the week ending 1/5 came out. Projected lower to 365k from 372k, it was actually at 371k up from a revised 367k. (The 4-week moving average is +6,700.) In the early going the 10-yr is back up to 1.89% and MBS prices are a shade worse. Later the Treasury winds up its first round of coupon auctions for 2013 with $13 billion re-opened 30-year bonds at 1PM EST and one hour later the New York Federal Reserve Bank will report on MBS purchases for the week ending Jan. 9.

It is Thursday, and Thursday night has its share of Happy Hour outings for many office-mates. Here are some bar, and other, bets you’re sure to win:

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses the role of the IRS and REMIC's in the current credit crisis. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.


(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries, go to www.robchrisman.com. Copyright 2013 Chrisman LLC.  All rights reserved. Occasional paid notices do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)


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