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HUD PROPOSES NEW DEFINITION OF QUALIFIED MORTGAGE HUD has put forth its own definition of a Qualified Mortgage (QM), which carries some distinct differences from the QM definition published by the Consumer Financial Protection Bureau (CFPB). In order for a loan insured by the Federal Housing Administration (FHA) to meet HUD's proposed QM requirements, it would have to require periodic payments, have terms not exceeding 30 years, and limit upfront points and fees to no more than three percent with adjustments to facilitate smaller loans. The Dodd–Frank Act required HUD to propose a QM definition that is aligned with the Ability-to-Repay criteria set forth in the Truthin-Lending Act (TILA) as well as the department's historic mission to promote affordable mortgage financing options for qualified lower income borrowers. "The new limit on upfront points and fees for all Title II FHA-insured single-family mortgages is consistent with the private sector and conventional mortgages guaranteed by Fannie Mae and Freddie Mac to attain qualified mortgage status under CFPB's final rule," HUD said in a statement. "Currently, HUD does not insure, guarantee, or administer mortgages with risky features such as loans with excessively long terms (greater than 30 years), interest-only payments, or negativeamortization payments where the principal amount increases. Moreover, HUD's existing underwriting standards require lenders to assess a borrower's ability to repay their mortgage debt," the agency continued. The proposed rule establishes two categories of QMs that have different protective features for consumers and different legal consequences for lenders. HUD's proposed Qualified Mortgage categories are determined by the relation of the Annual Percentage Rate (APR) of the loan to the Average Prime Offer Rate (APOR). By HUD's characterization, a Rebuttable Presumption Qualified Mortgage will have an APR greater than APOR + 115 basis points (bps) + ongoing Mortgage Insurance Premium (MIP). Legally, lenders that offer these loans are presumed to have determined that the borrower met the Ability-to-Repay standard. Consumers can challenge that presumption, however, by proving that they did not, in fact, have sufficient income to pay the mortgage and their other living expenses. The second category, Safe Harbor Qualified Mortgages, will be loans with APRs equal to or less than APOR + 115bps + ongoing MIP. Lenders originating these mortgages have the greatest legal certainty that they are complying with the ability-to-repay standard. Consumers can still legally challenge their lender if they believe the loan does not meet the definitions of a Safe Harbor Qualified Mortgage. HUD says its QM rule will provide credit access to creditworthy, but underserved borrowers. VA PAVES WAY FOR ELECTRONIC SIGNATURES The U.S. Department of Veterans Affairs (VA) announced that it will begin accepting electronic signatures in conjunction with its VA Home Loan Program. The move anticipates what some hope will be universally acceptable e-signatures and the fully electronic mortgage. "This is great news and paves the way for the FHA [Federal Housing Administration] to release a similar announcement soon, thus eliminating one of the very last obstacles preventing mass adoption of a full eClosing process," said Tim Anderson, director of eServices for DocMagic, an electronic loan documentation company. The VA said that "lenders are not required to use electronic signatures in the 24 course of closing VA home loans; but, if they choose to they must comply with the E-Sign Act, just as they are required to comply with all federal laws." DocMagic officials said VA's decision should prompt more mortgage industry participants to adopt the practice. "There can be no doubt that electronic documents, coupled with electronic signatures, are easier to track, safer for the borrower, and more expedient for the industry," said Dominic Iannitti, CEO of DocMagic. "We're very pleased to see the government providing clarity on this issue and expect to see increased eSign adoption in the near future." RESEARCHERS EXAMINE CREDIT PROFILES: TODAY VS. PRE-CRISIS Mortgage lending remains tight compared to historical norms, and lending could tighten even further as the government takes steps to lessen its role in the market, according to a recent report by Moody's Analytics and the Urban Institute. While the report concedes "underwriting does not appear overly tight in terms of debtto-income or loan-to-value ratios," the report's authors said the credit scores required to obtain a mortgage loan today are abnormally high. Not only is the average credit score of a GSE-backed loan today about 50 points higher than that of a GSE loan pre-crisis, but also the researchers pointed out, "Households with high scores today earned them during a tough economic period with high unemployment, weak stock prices, and declining house values." "In contrast, households had a much easier time obtaining high credit scores in the late 1990s and the early 2000s," they said. On the other hand, current debt-to-income ratios average between 35 and 45 percent, just slightly higher than the 30 percent average of pre-crisis days, according to the report. Loanto-value (LTV) ratios today average between 85 and 90 percent, again just slightly higher than pre-crisis average of 75 to 80 percent. Looking ahead, the researchers say, "Some impending moves by Fannie and Freddie and possibly the FHA [Federal Housing Administration] will tighten the credit box further." For example, the GSEs are increasing their down payment requirement from 3 percent to 5 percent and reducing the loan amounts they will accept. The FHA is likely to take similar measures, according to the research groups' report. "Reducing Fannie and Freddie's outsize role in the mortgage market is ultimately desirable, but will significantly tighten the credit box and impair the housing and economic recoveries if private mortgage lenders are not able to fill the void when that contraction occurs," the report said. "[I]t will clearly be important for policymakers to ensure that as they curb government lending they shrink its market share, not the size of the market," according to the analysts. KNOW THIS In 2012, rates fell below 4% for the first time in 50 years, and refinancing volume surged to $1.2 trillion, up one-third from the prior year, according to a newly published paper by Moody's Analytics economist Mark Zandi and Urban Institute senior fellow Jim Parrott.

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