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Qualified mortgages explained

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Recently, we released the Ability-to-Repay rule designed to protect consumers from irresponsible lending and begin to lay the framework for stability in the mortgage market.

This week, we issued an implementation plan to help ensure the industry effectively and efficiently puts these new protections into place, with the understanding that our rule should not unduly restrict lenders’ ability to make responsible loans. We estimate that the vast majority of loans originated today will meet the standards for a “Qualified Mortgage” so long as creditors follow the required procedures.

As part of the new rule, Congress also directed us to define a category of loans where borrowers would be more protected. So we released the criteria for a Qualified Mortgage. If you are a borrower getting a Qualified Mortgage, your loan cannot contain certain features that often have harmed consumers in the past, such as excess points and fees.

Making the rule

In crafting the rule, we carefully considered a wide array of perspectives and analyzed market data to help ensure that our rule would not unduly restrict lenders’ ability to make responsible loans.

According to data estimates we developed, roughly three-quarters of residential mortgages originated in 2011 meet the required debt-to-income ratio of 43 percent or below and also meet the other characteristics of a Qualified Mortgage loan. This does not, however, factor in the potential impacts of any caps on points and fees which are still pending clarification under our concurrent Qualified Mortgage proposal, among other relevant factors.

Transitional period

Our Ability-to-Repay rule also contains a temporary provision that treats loans that meet eligibility requirements set by the government sponsored enterprises and various Federal agency programs as Qualified Mortgages. This provision is a transitional measure meant to allow time to adjust to the new rules and for a full recovery of the mortgage markets. According to these same data estimates, roughly 20 percent of residential mortgages meeting these transitional criteria are above 43 percent monthly debt-to-income ratio. Again, this figure does not factor in potential impacts of the cap on points and fees.

Mortgage market recovery

Over time, we expect to see responsible lending practices flourish for all residential mortgage loans, including both Qualified Mortgages and other loans. We will continue to listen to consumers and businesses as we work to help the mortgage market – and consumers – recover from the financial crisis. We believe that our Ability-to-Repay rule is an important step toward bringing certainty to the mortgage market and the recovery.

Note: This post was updated at 4:45pm.

  • Izzy

    Yeah! My dad wrote this!

  • DebtNEUTRALITY

    In 2004, a California home with no mortgage was appraised at 800,000. The family was encouraged to take out a home equity line of 150,000 dollars by Bank of America. The family did so because they ungreedily assumed their home in ten years time would be worth around 1 million dollars (aka less than a 2.5 % yearly increase) and a 150,000 line of credit seemed like a very small portion of that one million dollar valuation.

    8 years later and that same home is worth around 500,000 and the family may not be able to make the payments on the 150,000 equity line because the elderly mother has dementia and the son cannot leave her alone all day so that he can work. The bank will be able to steal back this home in which the family put in 400,000 dollars in the cost of the home, property taxes and improvements, for that 150,000 dollars.

    It costs the son and mother LESS than 2,300 dollars a month to live in that home, but apart it would cost around 7,500 between a nursing home for the mother and an apartment for the son. The system has failed middle america.

    • Jason Howard

      In your case above the bank isn’t “stealing” anything. The family assumed the debt, and we can assume could afford it at one point. If they can no longer afford the mortgage then they have plenty of room to refinance, or to sell the house and move into something they can afford.

    • Mike

      The big, bad, evil bank would not “steal” the home. In your example there is $350,000 equity in the home. If you can’t afford the payments, sell the home, unlock the equity, and rent if you have to. I know, your family has lived in the home for 50 years, etc., etc. Get over it. Things change. And even if you did nothing and the loan went to foreclosure sale, the big, bad, evil bank would still not take the property back. It would go to an outside bidder and there would be a large overage for you.

  • single father

    I have been a single father since 2003, full time, and I have a total of 9 children (6 still at home). I also have my fiance’s 2 children here too! This makes 8 children in a 4 bed room home. I need to add onto my home to accommodate my growing family. I have a mortgage without a deed. Made a loan in 2006 to have the property in my name. The deed never got transferred into my name. I have been pleading with my Mortgage Co, title company, closing agent & praying to our governments agency’s since Dec. 2006 to help with this matter, which transpired from a contract between my Mortgage Co. & the Closing Agent in a contract to not close the loan if all criteria was not met. But they closed anyway, with no deed in my name and monies were dispersed anyways. The Mortgage Company is now threatening to foreclose on me on a piece of property that I never got to own. My children & I are living in an undersized home and I’m not able to do anything with this property as I am not the property owner. I’ve lived on here for some 20 years and raised all my children here. I was approved to have my home reconstructed to accommodate my family by the Neighborhood Foundation due to my finances back in 2009 and cannot have it done due to the property not being in my name to homestead. I cannot find an attorney that can handle this case pro bono or even find one that can handle this type of case.

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