In response to a directive last week from the Federal Housing Finance Agency, both Fannie Mae and Freddie Mac today issued bulletins indicating that they will only purchase qualified mortgages when the Ability-to-Repay rule goes into effect on January 10, 2014. EFFECTIVE WITH APPLICATIONS TAKEN ON OR AFTER JANUARY 10, 2014, both Fannie and Freddie will rely on selling lender Representations and Warranties that all loans purchased are, in fact, qualified mortgages or are otherwise exempt from the ability-to-repay rule (i.e. the loan is secured by an investment property).
Aren’t ALL loans eligible for sale to the GSEs automatically Qualified Mortgages? Why is this a big deal?
While there is a “GSE Exemption” in the QM rule that grants loans eligible for purchase by Fannie and Freddie QM status for the next 7 years (or until the GSEs are no longer in receivership, whichever occurs first), those loans still must meet certain overarching guidelines. In order to ensure that this happens, Fannie Mae and Freddie Mac are making the following changes to their product eligibility guidelines effective with applications taken on or after January 10, 2014 (note that individual lenders/investors may modify their product guidelines before this date, so be sure to watch for bulletins for those that you do business with):
- Loans that are not fully amortizing will be ineligible for purchase (i.e. interest-only loans) except for investment properties
- Loans with terms longer than 30 years will be ineligible for purchase
- Loans with points and fees greater than 3% of the loan amount (or that exceed limit for small-balance loans, if applicable) will be ineligible for purchase, except for investment properties
The elimination of the interest-only and other odd products will only impact a small percentage of the GSEs’ business (based on recent origination trends), but the points-and-fees restriction could have a large impact on originators – ESPECIALLY those with affiliated business relationships – because of the way that “points-and-fees” are calculated under the rule.
We’ll be discussing the Ability to Repay and Qualified Mortgage rule in depth in our CE courses this year, so be sure to get your spot reserved early! We’ll be publishing our CE schedule for 2013 later this month.
In the meantime, you can find the bulletins from Fannie Mae and Freddie Mac and some good information on compliance with the QM/ATR rule from the CFPB at the links below.
See you in class!