The Consumer Financial Protection Bureau (CFPB), which was created as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, has finally released the rules and guidelines concerning the definition of a qualified mortgage (QM).
I won't go into all of the details and will instead discuss what the new rules imply for banks, lending and housing activity.
There are two basic types of residential QMs that banks may originate: loans that don't allow borrowers to sue lenders after the fact for faulty underwriting and those that do.
I'll discuss that more in the future as we begin to get data indicating how bank lending is proceeding.
But for the most part, this is a huge positive event for banks, borrowers, mortgage backed securities markets and the economy overall.
The creation of the new rule is removing the concerns banks have had since Lehman crashed and especially since the passage of Dodd-Frank in July 2010. The opaque regulatory environment they've been working with since then has caused all lenders to maintain overly-conservative underwriting standards. The new rules are providing transparency again and that should result in a steady increase in banks' willingness to make more loans and their assertiveness in doing so.
For the most part, the new QM rules reflect what banks have been doing for the past few years anyway. Low and no documentation loans are disallowed and all borrowers must provide proof of income, assets and credit.
The big news is that QMs will allow for a total debt-to-income ratio of up to 43% for borrowers. That is a big deal. Prior to the underwriting mania of the early 2000s the Fannie/Freddie total debt-to-income ratio was capped at 36%. There have been concerns that that level or lower was what the CFPB was going to require for QMs.
The higher the total debt-to-income ratio allowed, the greater the aggregate pool of eligible mortgagors there is. This will help to support the housing market and the creation of new mortgages.
To put in context, during the mania underwriting years the debt-to-income ratio was largely undefined in practical terms, with borrowers having ratios above 50%, 60% or 70% being automatically approved regularly by computers and by the ratio not being considered at all because of low and no documentation loan alternatives.
But this news isn't equally good for everyone. Borrowers with incomes that fluctuate or are difficult to determine, like commissioned sales representatives and small business owners, will discover that their access to credit is not enhanced by the new transparent rules.
For investors, the easiest straight line play to capitalize on this is through Wells Fargo (WFC).
As I discussed last week, it is the only money center that is actively positioning itself and already prepared to grow further into the mortgage origination business.