Preparing For QRM; Reflecting On QM

BLOG VIEW: Two weeks ago, while the Mortgage Bankers Association's (MBA) 2014 Annual Convention and Expo was under way, the final version of the much-debated qualified residential mortgage (QRM) rule was released.

Under the final rule, lenders are required to keep a 5% ‘skin in the game’ if a loan they're selling to an investor has a debt-to-income ratio of more than 43%, a new stipulation that replaced the previous rule that a 5% skin in the game be required for the sale of any loan in which the borrower's down payment was less than 20%.

This new QRM definition, in addition to delivering much-welcomed clearer guidance for all members of the mortgage finance community, also provides cause for reflection on the previously enacted qualified mortgage (QM) rule and its effects.

It's still somewhat early to determine the totality of the QM rule's impact, but one thing that is clear is that the 3% points and fees cap clause created the most trepidation. In a survey of mortgage lenders by the National Association of Realtors (NAR) shortly after the rule was implemented, 60% of respondents indicated that they were "very concerned" about the cap's impact on their business operations. Many lending companies had to re-evaluate the risks and rewards associated with affiliated title insurance or other companies, as the fees associated with these services changed from being profits to potential liabilities because they counted toward the allowable 3%. In fact, 11% of respondents to the NAR survey reported that planned to close down affiliated companies.

An equally important, yet less-frequently discussed, impact the QM rule's 3% cap has made has been on the mortgage vendor industry. Because fees associated with banks' affiliate companies count toward the 3% cap, many lenders have sought to outsource title, appraisal and other operations. In turn, companies specializing in these services found themselves with a spike in demand.

Many companies in the mortgage vendor space have refined their operational efficiencies in order to meet demand and have subsequently flourished, while others had trouble innovating quickly enough to compete – with some shuttering. Others chose to take advantage of the loosely enforced regulations governing certain mortgage vendor sectors and contributed to the small crop of non-compliant companies that plague the lending industry. Still others have elected to remain on the sideline of the mortgage vendor industry for now, reluctant to open a new business until policies and procedures have become a bit more ironed out.

Amid all of the concern and upheaval experienced by lenders and vendors alike following the QM rule's implementation, however, one bright spot has emerged: Better, more effective technology. In the face of stricter regulation, additional layers of communication and accelerated timelines, improved technology platforms and systems have enabled the mortgage industry and its practitioners to not just adapt to change but oftentimes lead it.

So what lies ahead? Lenders continue to work to determine how best to comply with the 3% cap. A second NAR survey in July shows that for loans that did not meet the 3% cap on points and fees, the most cited method for handling them was to reduce the fees, but second was not to originate the loan.

For its part, the vendor industry is moving forward with creating and iterating best possible products and practices to support lender counterparts. On the legislative front, the House of Representatives approved a bill in June to modify the calculation of certain points and fees under the QM rule. Titled The Mortgage Choice Act, the bill would exclude insurance and taxes held in escrow and fees paid to affiliated companies from the points and fees tally. The bill is now before the Senate – but no further action has been taken on it.

Suffice it to say, then, that no clearly delineated path lies ahead for lenders and vendors. What's sure, though, is that rules such as QM and QRM will have far-reaching and challenging impacts, and that the passage of each new rule provides the opportunity to reflect on the effects its predecessors have had.

Rich Downs is an advisory member of United States Appraisals, offering professional appraisal management services in all 50 states. Downs has extensive experience in the mortgage, appraisal and management sectors. He has successfully founded and grown numerous companies in these industries and is a leading communicator and connector within the mortgage finance community.

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