By Ken Fears
On January 10, 2014, the requirements of the Ability to Repay Qualified Mortgage (ATR/QM) rule went into effect. All applications received on or after that date were required to comply with the rule that includes, among other things, full documentation of income, assets and employment, a maximum of 3 percent on points and fees, a cap of 43 percent on the back-end, debt-to-income ratio, and limitations on the type of mortgage products that qualify and prepayment penalties.
In conjunction with implementation of this rule, NAR’s Research Division distributed a survey to a panel of mortgage originators in January. The survey instrument was mailed out on January 6 and closed on January 20. Questions in the survey instrument covered the characteristics of the lenders, market concerns, and a subset of questions focused on the qualified mortgage rule. When asked if the new rules would impact their business, originators indicated that all of their production—to some extent—would be impacted, with a significant impact on a smaller percentage of transactions.
Of the new rules, the 3 percent cap on fees and points was by far of greatest concern with 60 percent of respondents indicating they were “very concerned” about that feature. Also of high concern were the limitations on pricing mortgages for the general QM standard and FHA standards relative to the average prime offer rate. The limitation on the back-end, debt-to-income ratio of 43 percent garnered high concern, as did the documentation requirements. However, respondents seemed to shake off the limitations on product features as 50 percent of respondents indicated that they were “not a concern” and no respondents indicated they were “very concerned” about these restrictions.
When asked how they would respond to the new regulations, 65 percent indicated that their response would depend on the requirements of investors, while 45 percent indicated that they would not offer non-QM mortgages. In addition, 20 percent would limit offerings of non-QM loans to high-quality borrowers, 5 percent would charge higher rates and 10 percent would cease originating to conduits or partners.
Survey participants were asked whether they would introduce a precautionary buffer in advance of certain limitations of the QM rule that would impact the different legal status of loans. Slightly more than half of respondents indicated that they would not include a buffer in advance of the 3 percent cap on fees and points, but almost as many indicated that they would implement a buffer. Nearly one-third of respondents indicated that they would implement a buffer of either 2.8 percent or 2.9 percent, and 10.5 percent indicated that the buffer would be as low as 2.6 percent.
With respect to the maximum back-end, debt-to-income ratio of 43 percent for compliance with the QM rule, 68.4 percent of respondents indicated that they would not have a buffer in advance of that restriction. However, 15.8 percent indicated that they would impose a modest buffer at 42.5 percent, while an additional 10.6 percent of respondents indicated that they would impose buffers of 41 percent or 42 percent.
The ATR/QM rule has only been implemented for a few weeks, but it is clear that originators are proceeding cautiously, deferring to the dictates of their investors and the secondary market, and largely staying within the confines of QM and, in many cases, applying buffers. It is still too early to tell the true impact on pricing and access to credit, but these results do indicate a modest tightening is possible in the near term. If the tightening is significant, CFPB has promised to revisit elements of the rule.
This column is brought to you by the NAR Real Estate Services Group.
Ken Fears is senior economist, director of Housing Finance and Regional Economics for the National Association of REALTORS®.
For more information, visit www.realtor.org.