What do you know about the GSE- Eligible Qualified Mortgage?
Are you worried about the new ability-to-repay and qualified mortgage rules? Do you know there is a partial exemption from the new mortgage regulations for GSE-eligible loans that is available even if the loan is not actually bought or guaranteed by a GSE? Please let us provide the basic overview!
Originating "qualified" mortgages will be very significant for the purposes of avoiding ability-to-repay liability and maintaining liquidity. However, the definition of a qualified mortgage is very narrow. It is important to know of all exceptions that your institution might be able to take advantage of. The topic of this article is a partial exception to the regular qualified mortgage definition for loans eligible to be sold to a GSE, which is found at 12 CFR 1026.43(e)(4).
Under this exception, a mortgage loan can still be deemed "qualified" despite not meeting the qualified mortgage underwriting requirements (1026.43(e)(2)(iv)), the consideration and verification requirements (1026.43(e)(2)(v)), or the debt-to-income threshold of 43% (1026.43(e)(2)(vi))!
To fit into this special category of "GSE-eligible QMs" ... the loan must meet the following two requirements:
#1) Be eligible to be purchased or guaranteed by a GSE.
The creditor need not actually sell the loan to the GSE ... the loan need only be "eligible"! Therefore, this exception can be applied even to loans held in portfolio.
A second issue here is sparking significant debate: is a loan "eligible" for sale if it meets GSE underwriting requirements, but not title or property eligibility requirements? Our interpretation is that a loan needs only to meet GSE underwriting requirements. The rule states that the loan must be eligible for sale, "except with regard to matters wholly unrelated to ability to repay." We believe property and title eligibility requirements are wholly unrelated to ability to repay, and we look to Comment 1026.43(e)(4)-4 for support. This Comment says that a loan is "eligible" if a creditor puts accurate information into the system and gets an "approve/eligible" recommendation from Desktop Underwriter--it does not refer to property or title eligibility requirements. Nonetheless, there are certainly a number of people taking the opposite position!
#2) Meet three additional requirements that should already be met if loan is to be sold or guaranteed by GSE.
These are requirements from the regular QM definition, and are found in 12 CFR 1026.43(e)(2)(i) - (iii). The first is that the loan requires regular periodic payments that are substantially similar and will not result in a balloon payment or negative amortization... basically this just means that the customer will be able to repay the loan, under the terms of the loan, in full within the loan term. The second is that the loan term does not exceed 30 years. The third is that the total points and fees do not exceed the cap in 12 CFR 1026.43(e)(3). These three requirements should not be exceedingly burdensome as GSEs already require similar standards to be met if the loan is to be purchased or sold.
The significance of this partial exception is two-fold. First, creditors actually selling loans to Fannie or Freddie can breathe a sigh of relief! The loans sold to Fannie or Freddie should be considered "qualified mortgages." Second, creditors not selling loans to Fannie or Freddie should also pay close attention to this partial exception.... even if they don't intend to deliver these loans to a GSE, it may be easier to meet GSE standards than those required to meet the regular definition of qualified mortgage!
Important Note!
Although a large number of loans are expected to fit within this exception, please note that it is only a temporary exception! It will expire on the sooner of January 10, 2021 or the date on which the CFPB's definition of qualified mortgage is superseded by each respective agency's authority to do so under 15 USCA 1639C.
Contrary to popular opinion, the CFPB regulations don't actually require you to lose money! As you go through the implementation process--including training, developing policies and procedures, and reconsidering pricing -- remember Warren Buffet's two rules: Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Thank you so much! SCA is here to serve you ... we're working hard to be your most trusted partner! Could you use a temporary employee with expertise in the new mortgage regulations to get through the implementation process? That's my job! I'm happy to come work on an as-needed basis to help your organization get through these new changes. Myself--and the other experts here at SCA--will work either under your supervision or spearhead projects ourselves.
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**These are our opinions. We're not authorized, or willing, to express those of others.**