NEW MORTGAGE RULES DEMYSTIFIED: WHAT EVERY AGENT NEEDS TO KNOW BEFORE JANUARY

Transcription

1 Real Estate Agent Webinar White Paper NEW MORTGAGE RULES DEMYSTIFIED: WHAT EVERY AGENT NEEDS TO KNOW BEFORE JANUARY On December 10, 2013 PNC Mortgage hosted an educational webinar for real estate agents entitled New Mortgage Rules Demystified: What Every Agent Needs to Know Before January. The webinar, led by industry expert Richard Andreano. Jr., addresses the new CFPB regulations going into effect in January. This white paper contains an overview of his presentation. CFPB Webinar Overview Richard Andreano, Jr., Partner at Ballard Spahr, LLP, delivered an informative webinar on December 10, 2013 covering new CFPB mortgage rules. In the webinar, Andreano covered the current state of the market, the fundamentals of the new CFPB rules, how these rules will impact homebuyers and overall strategies for success. Background Key Takeaways In January 2013, CFPB issued seven main mortgage rules, most will go into effect in January 2014 Ability to Repay Rule (ATR) - Requires stricter verification from lenders that consumers can repay loans Lenders may have more skin in the game with the new CFPB rules Potentially fewer loan products and tighter credit standards for borrowers Loan pricing may increase due to increased risk and higher origination costs Borrowers will experience a more rigorous underwriting process Seller paid points on behalf of the buyer may be an effective sales strategy At the start of his presentation regarding upcoming CFPB changes, Andreano provided detailed insights on the genesis of the CFPB and these new rules. According to Andreano, The Consumer Financial Protection Bureau was developed under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which became law in July Dodd-Frank was adopted forming the CFPB in part to address the residential lending crisis of Numerous rules and regulations were developed to enhance consumer protection. What many people don t know is that most rules were developed over several years, but not everything has gone into effect yet. Some of the most critical rules were developed a The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 10, The law was intended to improve accountability and increase transparency in the financial system.

2 NEW MORTGAGE RULES DEMYSTIFIED 2 year ago, but are just now going into effect this upcoming January. from Rural Housing Service, or eligible for guaranty by VA or USDA. Access the Webinar Replay On-Demand Visit the PNC Agent Alliance site at pncmortgage.com/ agentalliance to view replays of this and other real estate agent webinars. Fundamentals of New Rules For real estate agents and their clients, the rules that will have the greatest impact are the Ability to Repay (ATR) and Qualified Mortgage (QM) rules. Andreano described the rules in detail. Providing background on Ability to Repay, Andreano stated, The ATR rule requires lenders, before making a mortgage loan, to look at a consumer s financial information and be sure that the customer can afford to repay the loan. According to Andreano, the new ATR rule will apply to most loans that are subject to the Truth in Lending Act (TILA) which includes primary or secondary homes (such as vacation homes), home purchase loans, refinancing and home improvement loans. However, the rule will not apply to investment property loans exempt from the Truth in Lending Act, loans made as part of a program administered by a housing financing agency and home equity lines of credit. The rule will apply to home equity loans. Expanding on Qualified Mortgages, Andreano stated there will be three classes of mortgages, each with varying degrees of lender risk. The three classes of mortgages are the Qualified Mortgage (QM) with Safe Harbor, the Qualified Mortgage with Rebuttable Presumption and the standard non -QM Mortgage. The Qualified Mortgage with Safe Harbor provides the lender with the greatest protection from liability. The Qualified Mortgage with Rebuttable Presumption provides the lender more limited protection from liability. With the standard Non-QM Mortgage, the lender has the least protection from liability. Andreano also took time to explain the very important 3-Point Rule and how it is defined. The 3-Point Rule sets a 3% points and fees limit for loans of $100,000 or more. There are also specific rules that determine what s in and what's out of points and fees. Seller s points are excluded but not a cash contribution to the buyer. Also, most lenderpaid items are excluded. Outlining the new Qualified Mortgage (QM) rule, Andreano stated that there will be two main types of Qualified Mortgages, the General Qualified Mortgage and the Temporary Qualified Mortgage. Highlighting the differences, Andreano said the general QM will have a firm 43% debt-to-income limit. If it is an adjustable rate mortgage, underwriting will be based on maximum rate in five years following initial payment. Temporary QM s must meet certain general QM requirements, but instead of the firm 43% debt-to-income limit they must be eligible for sale to Fannie Mae or Freddie Mac, eligible for insurance Impact to Homebuyers Andreano indicated that the new CFPB laws will heavily impact real estate agents and their clients. He explained that lenders may assume more risk under the new CFPB laws and this will impact how lenders will do business. As a result, you may see fewer loan products, tighter credit standards and a lengthier underwriting process from some lenders. Moreover, Andreano explained that borrowers with little or no financial documentation will no

3 NEW MORTGAGE RULES DEMYSTIFIED 3...buyers will need to approach the home lending and buying process differently than they have in the past. Underwriting will be more stringent. The Ability to Repay (ATR) rule will require consumers to provide more financial documentation up front... longer be eligible for a mortgage loan, whether a Qualified Mortgage or non-qualified Mortgage. Andreano made four important points regarding limits applicable to Qualified Mortgages, which may be the only loans that many lenders make in the post CFPB rule launch year maximum loan term 2. No interest-only, negative amortization or balloon payment features permitted 3. Adjustable rates allowed 4. Loans qualify for safe harbor if annual percentage rate does not exceed specified index by 1.5 percentage points or more (High Priced Mortgage Loan HPML) According to Andreano, the overall takeaway is Lenders will have more skin in the game and buyers will need to approach the home lending and buying process differently than they have in the past. Underwriting will be more stringent. The Ability to Repay (ATR) rule will require consumers to provide more financial documentation up front, he says. Expanding further on new underwriting guidelines as applied to General and Temporary Qualified Mortgages, Andreano states the firm 43% debt-to-income limit will place some pressure on buyers. Borrowers approaching the 43% limit, or who are on the edge of temporary qualified mortgage underwriting may go into a non-qm loan. The challenge here is not all lenders will offer non- QM loans and non-qm loans may carry premium pricing. This may possibly impact your client s ability or willingness to pay a higher price. Strategies for Success Webinar Moderator, Sandra Zimmerman is Vice President and Regional Manager for PNC Mortgage. She believes there are several good strategies for addressing these new guidelines. First, get the lender involved early. Since there will be more stringent guidelines on underwriting and more support Get the lender involved early Additionally, focus on how you structure your deal to get the most value. information required. Getting the buyer documentation quickly, understanding the timing and the total amount the buyer will qualify for will help ensure a smooth process. Some other good ideas are to work with a lender that provides a lending documentation checklist and to insist clients are preapproved, not just pre-qualified. Echoing Zimmerman s recommendation related to underwriting, Andreano agreed, get the lender involved early in the process and focus on closing from the start, Andreano said. Keep your sights on the three main things you can control. These are affordability, documentation and deal structuring. Look for seller concessions and other seller-paid items for example single-premium mortgage

4 NEW MORTGAGE RULES DEMYSTIFIED 4 insurance, says Andreano. You can also consider recommending clients to lenders that offer non-qm products. The main thing to keep in mind is the best approach of the past may not be the best approach of the future. Rounding out the webinar, Andreano offered some closing advice to real estate agents on how to best structure deals. He also provided some illustrative examples. The main thing to keep in mind is the best approach of the past may not be the best approach of the future. If your sellers are not accustomed to making concessions, they may need to start opening up to this approach. Moreover, you need to be mindful of what types of seller concessions to offer to ensure a successful deal. Speaking on this point, he said a seller making a contribution to the buyer to pay down fees may not be the best bet. The buyer may then need to go beyond the limitations of the 3-point rule and their application may be declined. A better alternative may be for the seller to pay points to the lender. With this approach, it is much more likely that the loan will fit within the points and fees limit. This improves the chances of the loan being made. Additional Resources pncmortgage.com Find your local PNC Mortgage loan officer. pnc.com/homelendingupdate PNC s Portal for Mortgage Customers. consumerfinance.gov Search QM What it Means for consumer guide to QM/ATR rules. PNC Pre-Approval Access the Webinar Replay On-Demand Visit the PNC Agent Alliance site at pncmortgage.com/ agentalliance to view replays of this and other real estate agent webinars. Before your client begins looking at homes, it s important to know that your client is preapproved for a home loan and the loan amount for which they qualify. At PNC Mortgage, the pre-approval process includes a full credit review and if the client is approved, a true commitment to lend. A solid pre-approval can mean a faster process, greater negotiating power and more peace of mind*. Call your PNC Mortgage Loan Officer for more information. *Subject to property underwriting and appraisal. Borrower must satisfy preapproval conditions outlined in commitment letter. Loan amount subject to property appraisal. PNC Mortgage currently plans to offer non-qm loans when the new CFPB rules take effect.

5 NEW MORTGAGE RULES DEMYSTIFIED 5 About Richard J. Andreano Jr. Richard J. Andreano, Jr. is the Practice Leader of Ballard Spahr s Mortgage Banking Group. He has devoted more than 25 years of practice to financial services, mortgage banking and consumer finance law. Mr. Andreano advises banks, lenders, brokers, home builders, title companies, real estate professionals and other settlement providers on regulatory compliance and transactional matters, Federal Housing Administration issues, and administrative enforcement actions and investigations. Mr. Andreano is the principal contact for the firm in its role as federal consumer regulatory counsel to the Real Estate Services Providers Council, Inc. Mr. Andreano counsels settlement service providers on issues concerning the Dodd- Frank Wall Street Reform and Consumer Protection Act, Real Estate Settlement Procedures Act, Truth in Lending Act, among other regulations. He assists clients with preparing for and handling CFPB examinations and with a variety of regulatory issues. Mr. Andreano is author of the MBA Compliance Essentials Loan Originator Compensation Rule Resource Guide and co-authored chapters for the Mortgage Finance Regulation Answer Book. About PNC PNC offers a wide range of services for all our customers, from individuals and small businesses, to corporations and government entities. No matter how simple or complicated your clients needs, we're sure to have the products, knowledge and resources necessary for financial success. We provide a wide variety of lending options for first-time home buyers, move-up buyers and those purchasing a vacation home. We offer the optimal mortgage solution to ensure your clients obtain the loan that's best for them. Experienced mortgage professionals serve your clients through any of our more than 2,700 Retail Banking branches and our nationwide network of mortgage offices across the continental United States. With a loan portfolio of $130 billion as of 9/30/13, PNC Mortgage is recognized as a top national residential mortgage originator and servicer.

6 REAL ESTATE AGENT WHITE PAPER ADDENDUM 6 Questions from December 12 webinar Will sellers be able to advertise their offer to pay buyer points? Will there be any rules regarding this? Andreano believes a seller s willingness to pay buyer points will definitely be promoted one way or the other. Sellers will obviously not be promoting financing. However, in addition to listing their price, sellers may advertise that they are willing to pay points to buy down the rate of the loan the buyer is looking to obtain. Buyers may find this to be an appealing offer for them to purchase the home since it will help them qualify for the loan. What is the limit of percent of points that the seller can pay towards a buyer s closing costs? Andreano said...very interesting, there is no actual limit. While there is a limit on the extent to which a borrower themselves pays points and the extent to which those can be excluded from the points and fees, the seller point exclusion has no requirement. Keep in mind, seller contribution rules of FHA or other programs will still apply and may restrict the amount a seller can contribute, but the CFPB rules themselves will not limit the seller contribution. Can you explain seller points in more detail? Andreano notes, Basically, instead of a seller giving funds to the buyer, the lender will actually impose points on the seller. The rule does not set forth any requirements on how this is documented and this will vary from lender-to-lender. In basic terms however, the overall process will reflect a tighter relationship between the seller and the lender in the transaction to move the loan forward. How do you see this point limit and lending restriction impacting short sales? It is a very good question. The industry, in fact, sought various exceptions to deal with the current foreclosure inventory. Unfortunately, those exceptions did not go through. It may have been beneficial to include exceptions to help us get through the backlog of foreclosed properties. This will be something that will need to be addressed moving forward. says Andreano. Will the 3-Point Rule start in January for all loans including conventional, FHA, VA, etc.? According to Andreano, Again, the 3-Point Rule going into effect in January will impose restrictions on the points and fees a buyer can buy down, but not in seller contributions. There are restrictions on seller contributions that are currently imposed on FHA loans, VA loans, etc. These will continue to remain in place until further notice.

7 NEW MORTGAGE RULES DEMYSTIFIED 7 Live Poll Questions & Results Webinar attendees were asked to complete a series of quick polls. The charts below show their collective response. Commentary from the keynote speaker is shown at the right. According to Rich Andreano, first-time buyers will be among those most impacted by the new rules. Andreano noted, the new rules do not apply to investment property loans exempt from the Truth in Lending Act, loans administered by a housing financing agency, or home equity lines of credit. The rules will apply to home equity loans. Andreano stated, sellers may need to be more flexible in paying down points in the future to ensure a sale moves forward.

8 REAL ESTATE AGENT WHITE PAPER ADDENDUM 8 QM and Your Clients

9 IMPORTANT INFORMATION The opinions, beliefs, guidelines, and advice shared in the following presentation are the creation of Ballard Spahr, LLP and do not necessarily reflect the views or opinions of PNC. PNC is a registered service mark of The PNC Financial Services Group, Inc. ("PNC"). PNC Mortgage is a division of PNC Bank, National Association, a subsidiary of PNC. All loans are provided by PNC Bank, National Association. This information is provided for business and professional uses only and is not to be provided to a consumer or the public. This information is provided to assist real estate professionals and is not an advertisement to extend consumer credit as defined by Section of Regulation Z. Programs, interest rates, and fees are subject to change without notice The PNC Financial Services Group, Inc. All rights reserved. PNC Bank, National Association. Member FDIC.