Remember not to underwrite Jumbos under the Temporary QM exemption
This is old news to most people, I'm sure. But since we're hearing rumors that some lenders are still qualifying jumbo mortgages as "QM" under the temporary exception for GSE-eligible loans, we'd like to make a quick note of this.
The best category of QM (of which I believe there are 7 now?) is the so-called GSE-eligible QM. Otherwise known as the "Temporary QM" or "Fannie/Freddie QM" ... I guess everyone calls it something different. I say "Best" because it offers relaxed underwriting requirements and no other limitations such as a 3-year prohibition on sale or asset-size requirement.
But as much as we'd love to originate every loan as a Temporary QM, this exception does not apply to jumbo mortgages. There is no scenario where a jumbo mortgage can qualify as a Temporary QM.
Rule: Must be GSE-Eligible
To avoid the full QM requirements and qualify as a Temporary QM, the loan needs to be "eligible for sale" to Fannie or Freddie (remember VA and FHA- eligible loans have their own definitions). That's just eligible - a loan doesn't have to actually be sold.
To get more specific (which as we'll see, is unnecessary) - the rule requires that it be "eligible for sale" to Fannie or Freddie "except with regards to matters wholly unrelated to ability-to-repay." So, if you read this carefully, and you want to take maximum advantage of Temporary QM, you might make a reasonable argument that the precise loan amount is unrelated to ability-to- repay, and that, therefore, the sole fact that a loan is a jumbo shouldn't prevent it from being a Temporary QM.
For example: if Borrower A earns $200,000 per year and wishes to have a loan for $517,500 (let's say that's the applicable jumbo limit), how would the borrower's ability-to-repay be affected if the loan is instead for $517,501?
CFPB Interpretation
Well, the CFPB just does not agree. In the Preamble you'll find this statement from the CFPB:
Notably, the temporary qualified mortgage definition does not include "jumbo loans." The [CFPB] does not believe that creditors making jumbo loans need the benefit of the temporary exception, as the [CFPB] views the jumbo market as already robust and stable.
Simple Takeaway
There IS a reasonable argument against the CFPB's interpretation ... but I don't believe that helps much. We can all hope that Quicken sues the CFPB to challenge this. But until then--or unless you're willing to duke it out yourself in court-- you can bet all regulators, and private parties, will adopt the CFPB's interpretation of this. After all, the CFPB is the one who wrote the rule.
Takeaway? To qualify as a Temporary QM, you'll want to successfully run the loan through automated underwriting. It's that simple.
Can I fix this?
So what if, you originated a bunch of jumbo loans pursuant to the Temporary QM exception and kept them in portfolio? You'll want to identify those and reclassify them if possible. If you originated those through a broker, you'll want to see if your contract gives you any ability to go back on the broker- did they warrant compliance?
But what if you've purchased jumbo loans that the lender classified as Temporary QM? You'll want to check this, but so long as your contract is strong and the lender has the ability to "pay up" if necessary, you may be in a position to "pull a Fannie," which is what we call profiting off a loan until/if if goes delinquent, and then using any compliance error to push it back on the original lender.
**Special Note: TRID Grace Period**
You may have heard that the CFPB announced it will take into account "good faith efforts" to comply with TRID. We just have two comments on that. First, the CFPB is probably not your direct regulator. Second, this has absolutely no effect on the civil liability that comes with TRID--in 3 years when you have a loan post August 1, 2015 go delinquent, do you think the borrower (now plaintiff or defendant) is going to say, "Aw, don't worry about it- we'll go easy on you because you took good faith efforts to comply with TRID- we know you were trying your gosh darn hardest!"
In other news:
We're still 2.3 million construction jobs below the previous peak. Is that a sign of things to come? This WSJ article argues that there is simply a lack of skilled labor and posits that this may be because the slump between '06 and '11 was so long that (a) older workers couldn't wait that long and left, taking different types of work or retiring and (b) no younger workers were attracted.
Hey here's a great summary of TRID if you're looking for something dependable to distribute to staff.
Another week, another CFPB enforcement action. This time they fined a mortgage lender $228,000 for violating the LO Comp Rule.
Having a Bad Day? See below "Tip of the week", sent to us by our friend Jeff Lipes from United Bank
If anyone is having a bad day, remember that in 1976, Ronald Wayne sold his 10% stake in Apple for $800.
... today it is worth $58,000,000,000 ($58 billion) !
ON THE LIGHTER SIDE
"Former Governor of Rhode Island Lincoln Chafee is challenging Hillary Clinton for the Democratic nomination. During his announcement, Chafee said it would help our economy if we embraced the metric system -- finally answering the question: 'What is the world's worst campaign slogan?'" -- Jimmy Fallon
Hey there's a reason you pay a therapist to listen to you vent. Do you, or does someone you know, talk too much? I love listening to people ... but I can see some situations where it could be a problem. Perhaps if that person is in charge of interviewing candidates, or if you have another meeting to get to in 10 minutes. According to an article in the HBR, there are 3 phases to a conversation: (1) you're saying relevant things and people are actually listening, (2) you start to wander off and may not realize that people have stopped listening, and (3) you may not even know what you're talking about anymore and you realize they're definitely not listening. [Side note - obviously a drastic generalization, and won't apply in many cases, especially not to good storytellers.] So HBR recommends a Traffic Light Rule: talk for 20 seconds (green light- stage 1), start wrapping it up or stop within the next 40 seconds (yellow light- stage 2), and after that you better pull the plug (red light- stage 3).
"While 'tradition' may be one of the finest songs from the Broadway musical Fiddler on the Roof, it is a killer at community financial institutions. Tradition breeds comfort, sloth, inattention, and lack of intelligence."
- Douglas V. Austin
(in "The Community Bank Survival Guide")
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