What do you know about the VA's Qualified Mortgage?
Some thoughts on how the VA is dealing with the QM Rule.
In honor of Veterans Day, we'd like to provide a basic intro. into
the Veterans Affairs definition of Qualified Mortgage (Yes. It is different than the Regular QM, also the Small Creditor QM, and the Fannie/Freddie QM).
Before jumping into it this morning, I'd like to point out that our
oldest veteran thinks whiskey is "just like medicine," smokes cigars daily, and still lives in the house he bought for $4,000 after returning from WWII (he's 108). You have to love it!
The CFPB was authorized to define "Qualified Mortgage" as it saw fit ... but certain agencies were left to do the same. So the CFPB's version controlled unless another agency stepped in. Both the FHA and VA have acted to define their own versions of QM.
Here are the basics on how VA decided to define QM.
VA = 100% Qualified Mortgage
Every single VA-guaranteed or -insured loan will be QM ... it is impossible for a VA loan to be non-QM.
What's missing?
The VA definition of QM does not include:
Appendix Q. To qualify as a QM, a loan guaranteed or insured by the VA does not need to survive Appendix Q's underwriting standards.
Points & Fees Test. The VA version of QM does not have a points and fees test.
Debt-to-Income Ratio. The VA version of QM drops the 43% requirement
But Note: Many of the traditional QM requirements are brought back in for a special exception for certain refinances from the ATR Rule's enhanced verification requirements.
Full Safe Harbor vs. Rebuttable Presumption
As opposed to the APR test under the other versions of QM, almost all VA loans will be full safe harbor QM. The only exception is for IRRLs (interest rate reduction refinance loans), which have to meet additional requirements. Note: As a reminder, full safe harbor simply means the loan is conclusively presumed to meet the Ability- to-Repay test. Otherwise, a non-safe harbor QM gets merely a so- called rebut-table presumption, i.e,. the loan is presumed to meet the Ability-to-Repay test but the borrower is given the chance to prove otherwise.
To summarize:
All loans the VA makes directly will be full Safe Harbor QMs (e.g., VA Direct Loan, Vendee Loans)
All purchase money loans that are guaranteed or insured by the VA will be full Safe Harbor QMs
Most, but not all, refinances will be Safe Harbor QMs.
IRRLs will be Safe Harbor QMs only if-
Loan refinanced is at least 6 months old;
Recoupment period for allowable fees + charges (financed or paid at closing) does not exceed 36 months; AND
All other standard requirements for IRRLs
All other refinances will be Safe Harbor QMs
As noted above, there is also a special exemption for IRRLs from the ATR Rule's enhanced verification requirements (but to be exempt, many of the standard QM requirements must be met, such as the Points & Fees test). As K&L Gates points out,
The VA believes the exemption is necessary to avoid origination delays of two to four weeks on IRRRLs that would have a costly effect on veterans and potentially reduce the availability of the loans.
Rationale Behind VA Definition of QM
Why was it important for the VA to issue its own definition of QM? Well, according to Ballard Spahr's report on this issue,
[T]he VA noted that of the loans that the VA guaranteed in FY 2013, over 95,000 would have exceeded the CFPB's strict 43% DTI ratio, and nearly 5,000 would have exceeded the APR limit to qualify for the QM safe harbor. The VA stated that it needed to address and ease concerns of veterans, lenders, and investors on the potential effect of the QM requirements on the VA's programs, and issued this interim final rule to provide legal certainty and re-stabilize the market for VA loans.
In other news:
To respond to RD's public challenge at the EMCN conference last week, I have an opinion on what to do with the Loan Officer's name on the new mortgage disclosures when the LO leaves the company before the loan closes. As you know, the LO's name and contact info. must be listed accurately on both the Loan Estimate and Closing Disclosure. What if the LO leaves for a different company before the loan closes? My opinion is that (1) a revised Loan Estimate is not required and should not be given, (2) of course, the Closing Disclosure should accurately reflect the new LO, and (3) if the Closing Disclosure has already been given, the 3-day waiting period would not be triggered even if this was revised for this reason. The preamble says that the Rule "facilitates the goal of limiting excessive redisclosures by limiting legitimate reasons for redisclosures to the six exceptions set forth in Section 1026.19(e)(3)(iv)." Different LO contact information does not fall under any of these categories, therefore I believe that not only would a revised Loan Estimate not be required, but that it would actually be inappropriate. But can we have some common sense here? It might be a best practice to separately notify the borrower of any change in loan officer, it's just that this would be done without revisions to Loan Estimate
And the winner of Dad Joke of the Year goes to Sean Mahoney, one of New England's top regulatory compliance attorneys, who, while on a trip to DC with his kids, went past some vehicles marked 'secret service' and joked that "If they really want to be secret service agents, maybe they shouldn't have a website, or have cars marked secret service." Thanks Sean!
I recently heard a somewhat jaded reference to CFPB employees as "28-year olds living in rent-controlled districts in Bethesda," and the suggestion that "perhaps these mortgage regulations will start to change when these people grow up and try to buy houses." As a 27-year old myself, I'm not sure I have enough seasoning to comment intelligently on such matters ...
Thanks to everyone who attended last week's Mortgage Advisory Board event at the Bank of Canton. It is sincerely a humbling feeling to be surrounded by so many highly regarded mortgage professionals, and I hope a tradition has been established that will last for years to come.
"One hand, one million dollars, no tears."
- Statement made by John Gutfreund (Business Week's "King of Wall Street") to one of Salmon Brothers' top traders, challenging him to a game of Liar's Poker, as reported in Michael Lewis' book "Liar's Poker" (c) 1989.
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**These are our opinions. We're not authorized, or willing, to express those of others.**