Quality Residential Mortgage And What It Means To You

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It’s something you’ll be hearing more of in the near future and it’s not pretty. Quality Residential Mortgage or QRM is going to be a game-changer.

So what is a Quality Residential Mortgage (QRM) and let’s talk about how it’s going to impact you.

There is no doubt that one of the main reasons for the housing collapse was that mortgage underwriting became too lenient. It seemed anyone who wanted to purchase a home found someone to give them a mortgage; whether they actually qualified for it or not. These buyers eventually couldn’t make their monthly mortgage payment and many went into foreclosure.

This started the downward spiral in home values which crashed our economy.The government is now calling for adjustments to the definition of a “Qualified Residential Mortgage” (QRM) in order to guarantee this never happens again. Like many adjustments that follow a disaster, some are claiming the pendulum is swinging back much too hard. Let’s look at the requirements being considered.

The FHFA issued a Mortgage Market Note 11-02 last week which discusses QRM. Here are the highlights:

Types of mortgages that will qualify

A Product-Type qualified residential mortgage is a first-lien mortgage that is for an owner-occupant with fully documented income, fully amortizing with a maturity that does not exceed 30 years and, in the case of adjustable rate mortgages (ARMs), has an interest rate reset limit of 2 percent annually and a limit of 6 percent over the life of the loan.

Therefore, the following loans WILL NOT qualify:

Alt-A (most of which are low or no document) mortgages
Interest-only mortgages
Negatively amortizing mortgages such as payment option-ARMs
Balloon mortgages

Acceptable debt ratios

A PTI/DTI qualified residential mortgage has a borrower’s ratio of monthly housing debt to monthly gross income that does not exceed 28 percent and a borrower’s total monthly debt to monthly gross income that does not exceed 36 percent.

Payment-to-income ratio, otherwise known as front-end DTI, is the sum of the borrowers’ monthly payment for principal, interest, taxes, and insurance divided by the total gross monthly income of all borrowers as determined at the time of origination. Debt-to-Income ratio, or back-end DTI, is similar to payment-to-income but adds all other fixed debts into the numerator of the ratio.

Down payment requirement

An LTV ratio qualified residential mortgage must meet a minimum LTV ratio that varies according to the purpose for which the mortgage was originated.

For home purchase mortgages, the LTV (Loan To Value) ratio will be 80% which means a buyer would need a 20% down payment.

Necessary FICO score

A FICO qualified residential mortgage has a borrower’s FICO score greater than or equal to 690 at the origination of the loan….

Given that currently, many loans are written for buyers with FICO scores as low as 590, this will eliminate many hopeful home purchasers.

To give you an idea of the severity of these proposals, for the average mortgage written in 1997 (well before the housing mess), only 20.4% would have qualified for these current suggested QRM requirements. As mortgage underwriting has become much more stringent in the past three years, for mortgages written in 2009, only 30.5% (less than a 1/3) would qualify as QRM.

When will this take place? As President Obama likes to say, “Let me be clear…”, these are proposed adjustments which are currently up for debate.

Whatever is approved will only apply to government backed mortgages. The private sector will still be allowed to lend their money based on their own criteria (ex. 10% down payments).
However, there will be increased costs to lending institutions which do not use the QRM. Those costs will be transferred on to the purchaser.

What might these increased costs amount to?

Cameron Findlay, chief economist for LendingTree, in an article on the ramifications of QRM explained:

Homeowners who do not qualify for a loan that meets the new definition (mortgage insurance doesn’t appear to be part of the equation) would be forced to pay substantially higher rates. Early market estimates place that number as much as 3.00% higher than the QRM equivalent rate (on a $200,000 loan, that’s almost $400 more a month).

What It Means For Buyers

Clearly the debate on this will be fierce. There will be many on the side of reason that will argue against a few of the finer points like a 20% down minimum requirement. For many Long Islander’s looking to buy a home, this will mean one thing: In order to buy a home, you’ll be relocating out of state. The alternative is that you’ll be putting less down, thus not meeting the QRM requirements and you’ll be paying much more for your mortgage which all in all, won’t be all that bad since a mortgage is an investment of money that you get write-off’s for but honestly, who wants to pay more for borrowed money?

Bottom line for buyers, the incredible low rates right now, make it a no brainer. The cost of borrowing is going to rise.

What It Means For Sellers

This is obvious. It is common knowledge that Long Island is not a hot spot of inward relocation. It is the exact opposite. It’s referred to as the “brain-drain”. We are losing our youth to other states like North Carolina, Florida and Nevada.

For homeowners looking to sell (and perhaps buy), while rates are low and mortgages are “normal” to acquire, it’s also a no-brainer to speak with a professional Realtor(R) about the market and home pricing.

The purpose of this article is not to scare you (although it should a little) or present QRM as a “bad thing”, but rather provide you with valuable information that will help you make the best decisions for you and your family, right now. I hope it was helpful.