WHAT TO EXPECT WITH DODD-FRANK AND WHY QM DOESN T MATTER.

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1 WHAT TO EXPECT WITH DODD-FRANK AND WHY QM DOESN T MATTER. JANUARY 8, 2014 finance.car.org (213) financehelpline@car.org

2 BACKGROUND ON THE LENDING ENVIRONMENT Sara Sutachan Manager of Broker & Real Estate Finance Outreach C.A.R. FINANCE.CAR.ORG

3 Today s Presenters: Sheilah Goodman, Associate General Counsel for Fannie Mae Nancy West, Marketing and Outreach Specialist for HUD Jim McCraw Area Lending Manager for Citibank Kyle Kasperick Senior Lending Manager for Chase

4 Source: LPS Fannie & Freddie are the Market

5 Mortgage Rates 8% FRM ARM Federal Funds 7% 6% 5% 4% 3% 2% 1% 0% SERIES: 30Yr FRM, 1Yr ARM, Federal Funds SOURCE: Federal Home Loan Mortgage Corporation

6 Acronyms QM = Qualified Mortgage QMR = Qualified Mortgage Rule APR = Annual Percentage Rate APOR = Average Prime Offer Rate ATR = Ability to Repay TILA = Truth In Lending Act CFR = Code of Federal Regulations AUS = Automated Underwriting System DU = Fannie Mae s Desktop Underwriter LP = Freddie Mac s Loan Prospector TotalScorecard = FHA s overlays to Fannie & Freddie

7 Ability to Repay/Qualified Mortgage Rule Sheilah Goodman Associate General Counsel 7

8 Ability to Repay and Qualified Mortgage Rule Overview Ability to Repay (ATR) Requirement Creditors must determine that borrowers have a reasonable ability to repay a loan based on consideration and verification of factors indicative of a consumer s credit capacity, including income/assets, employment status, monthly housing payment (PITI, HOAs and subordinate financing), other debt obligations, DTI and credit history Safe Harbor APR < 1.5% over APOR 2 Every Qualified Mortgage must: Have a fully amortizing payment (FR or ARM) Have a term of 30 years or less Not have points and fees in excess of 3% of the loan amount 1 Qualified Mortgage Special Qualified Mortgage 3 Maximum 43% DTI Underwritten using the max interest rate in the first 5 years Verifications generally per FHA Guide Eligible for sale to a GSE per published guide, applicable variance or AUS approve/eligible recommendation Examples of Loans Exempt from ATR: Investor Loans HFA & Non- Profits Rebuttable Presumption APR 1.5% but <6.5% over APOR Maximum 43% DTI Underwritten using the max interest rate in the first 5 years Verifications generally per FHA Guide Eligible for sale to a GSE per published guide, applicable variance or AUS approve/eligible recommendation 1 Subject to permitted exclusions and different standards for lower-balance loans. 2 APOR (Average Prime Offer Rate) is based on Freddie Mac s market survey of interest rates 3 Expires upon earlier of 7 years or when GSEs (or successor entities) are no longer to subject to conservatorship or receivership. Separate rules apply for FHA/VA and other government loans as well as certain portfolio loans. 8

9 Mortgages Eligible for Sale to Fannie Mae FHFA directed Fannie Mae and Freddie Mac to limit acquisitions beginning January 10, 2014 to loans that: are fully amortizing (e.g., no negative amortization or interest-only loans); have terms that do not exceed 30 years (e.g., no 40-year terms); and have points and fees that do not exceed 3% of the total loan amount or such other limits for low balance loans as set forth in the ability to repay final rule; -or- if the loan is exempt from the ability to repay requirements, have points and fees that do not exceed 5% of the total loan amount as defined in the ability to repay final rule. 9

10 Overview of Announcements August Lender Letter ( ) New Eligibility Criteria FHFA has directed Fannie Mae and Freddie Mac to incorporate new loan eligibility requirements in response to the CFPB s Ability to Repay rule. Life of Loan Representation and Warranties The new eligibility criteria fall under lenders life of loan representations and warranties to Fannie Mae. Consistent with current obligations, if a loan that is subject to TILA fails to meet the ability to repay requirements, it would violate the representation and warranties regarding compliance with laws. October Lender Letter ( ) Quality Control Given industry challenges with implementing the wide range of Dodd-Frank regulatory changes, Fannie Mae and Freddie Mac will not be reviewing lenders compliance with the new points and fees eligibility criteria at this time. We will provide further guidance on our quality control standards before beginning those reviews. Repurchase During this transition period we will only request repurchase for points and fees violations in limited circumstances. 10

11 LENDERS PERSPECTIVE: EVALUATIONS & APPROVALS Jim McCraw Area Lending Manager CitiBank Kyle Kasperick Senior Lending Manager Chase

12 The Qualified Mortgage Rule What it Means for Citi and the Distributed Sales Organization

13 Context and Definition of the Qualified Mortgage Rule The Dodd-Frank Act requires the Consumer Financial Protection Bureau (CFPB) to issue and implement regulations requiring creditors to assess a consumer s ability to repay a residential mortgage and define qualified mortgages that presumptively comply with ability-to-repay (ATR) requirements The CFPB s final rules will become effective for loan applications on or after January 10, 2014 The ATR/Qualified Mortgage rule requires a creditor to make a reasonable and good faith determination at or before loan closing that the consumer will have a reasonable ability to repay the loan according to its terms Non-compliance with ATR and QM may subject lenders to consumer class action lawsuits 4

14 What is a Qualified Mortgage QM/Ability-to-Repay Requirements Income, assets and debts must be documented and verified A borrower s monthly debt, including the mortgage, cannot be more than 43% of the borrower s monthly pre-tax income (General QM) General QM and Agency QM loans must be the agency DTI guidelines. ARMs The qualifying payment must be based on the maximum possible rate in the first 5 years QMs cannot have the following risky loan features: An interest-only period Negative amortization Balloon payments Graduated payments Loan term greater than 30 years Points and Fees Limitations Loan Amount Limit >= $100,000 3% of Total Loan Amount <$100,000 to >= $60,000 $3,000 <$60,000 to >= $20,000 5% of Total Loan Amount <$20,000 to >= $12,500 $1,000 <$12,500 8% of Total Loan Amount Does NOT include Realtor fees Appraisal costs (unless third party affiliate) Title costs (unless 3 rd party affiliate) Credit reports

15 QM and Non-QM Implications QM and Non-QM Loans Qualified Mortgage Loans are presumed to satisfy the ATR rule Non-Qualified Mortgage Loans must be in compliance with the ATR rule Negative amortization No-doc loans Balloon payment loan Interest-only

16 New ATR Underwriting Criteria The customer s ability to repay must be verified through third party documents considering a minimum of eight underwriting factors Credit history Current and expected income or assets Employment status Monthly debt to income ratio or residual income Current debt obligations, alimony, and child support The monthly payment for mortgage-related obligations The monthly payment on the subject loan and The monthly payment on any simultaneous loan

17 New Appraisal Rules Appraisal Rule Borrowers for first-lien loans must to be provided with copies of all appraisals, as well as other written valuations, developed in connection with the application, whether or not the applicants request copies The copies must be provided promptly upon completion or 3 business days prior to consummation, whichever is earlier The above requirement applies whether the credit is extended or denied, or the application is incomplete or withdrawn Copies of the appraisal or other written valuation may be provided by mail or electronically subject to E-sign Act Requirements A disclosure must be provided to the applicant no later than 3 business days after receiving the application notifying the applicant of their right to receive copies of all written appraisals developed in connection with their application

18 Citi Credit Policy Under the QM Most of Citi s products will be QM loans with points and fees limited Continue to originate ARMs Continue to originate CRA Products Non-Conforming Loans will follow QM guidelines Exception: Interest Only for High Net worth Clients (1MM above assets, 250K with Citi) Credit Policy Changes 40 year term mortgages no longer offered Interest Only Loans only offered through the High Net Worth Program 5-1 ARM no longer offered; continue to offer 5-1 ARM Maximum rate increase of 2% after 5-year fixed period No more than 2% increase over the original note rate per adjustment period No more than 5% increase over the original note rate over the life of the loan HPML transactions will be limited to FHA/VA (non-streamline) and NACA/Bond Programs Maximum DTI 43% for Retail agency and non-agency transactions The Fixed Rate Home Equity Loan must comply with QM requirements including maximum DTI of 43% 2014 Citibank, N. A. Equal Housing Lender, Member FDIC. NMLS# Citi, Citibank, Arc Design and Citi with Arc Design are registered service marks of Citigroup Inc.

19 The Qualified Mortgage rule requires lenders to make a good faith effort to determine that a borrower can repay the mortgage loan QM has two general requirements: Restrictions on certain loan features: no interest only, no negative amortization, no balloons, no terms greater than 30 years, ARMs underwritten to full index adjustment, not initial rate Points and fees: cannot exceed 3% Assets, debts and employment are subject to full verification; in some cases, this could include verification of sources of down payment QM contains no explicit down payment or credit score requirements

20 FHA Qualified Mortgage Rule & Other Updates Nancy West, U.S. Department of Housing And Urban Development January 2014 Company LOGO

21 Qualified Mortgage Rule And FHA The rule corresponds with HUD s charge to balance its statutory mission with the requirement in the Truth in Lending Act (TILA ) as amended by the Dodd Frank Wall Street Reform and Consumer Protection Act that prohibits lenders from making mortgage loans unless the lender makes a good faith determination of ability to repay On December11, 2013, the Department of Housing and Urban Development published its Final Rule in the Federal Register Qualified Mortgage Definition for HUD insured and guaranteed single family mortgages

22 QMR For FHA Insured Mortgages Effective for all loans with Case Numbers assigned on or after January 10, 2014, and which HUD insures or guarantees, will be a Qualified Mortgage Have periodic payments Term not to exceed 30 years Not have points or fees greater than 3% of the original unpaid principal balance for most loans Loans under $100,000 are given more flexibility Be insured or guaranteed by HUD Exceptions for Home Equity Conversion Mortgage

23 Safe Harbor Qualified Mortgage Categories Mortgage does not exceed limits on upfront points and fees Has an annual percentage rate for a first lien that is equal to or less than the annual prime rate offer plus 115 basis points plus on-going annual/monthly mortgage insurance premiums Offers lenders the greatest certainty that they are complying with the borrower s ability to repay

24 Qualified Mortgage Categories Rebuttable Presumption Mortgage does not exceed limits on upfront points and fees Has an annual percentage rate that exceeds the average prime offer rate as of the date the interest rate is set plus 115 basis points plus the annual/monthly mortgage insurance premium Lenders that offer these loans are presumed to have determined the borrower met the ability to repay standard

25 Differences Between Categories Safe Harbor Conclusively presumed to comply with TILA ability to repay requirement Underwriting requirements are sufficient to ensure lender made reasonable and good faith effort to determine ability to repay Borrower can still challenge if points & fees exceed 3% Rebuttable Presumption Presumed to comply with TILA ability to repay requirement Allows borrower to bring a claim that the lender did not make reasonable/good faith ability to repay determination Compliance must show that the lender did not make a good faith determination when underwriting according to HUD s requirements

26 Differences Between Categories Safe Harbor provides the greatest legal certainty for lenders Borrower in default can only challenge ability to repay standard was not met because of points and fees Rebuttable Presumption A borrower could claim the ability to repay standard was not met because of either the points and fees limit was exceeded or the lender failed to follow HUD s underwriting requirements or both

27 Exemptions Exempt from the up-front point and fee limit and are deemed Safe Harbor Qualified Mortgages are: Title I mortgages Title II mortgages for manufactured housing Section 184 Indian Housing Loan Guarantee Section 184A Native Hawaiian Housing Loans NOTE: There are additional exceptions. Please refer to the Federal Register Notice at:

28 Mortgage Loan Limits Mortgagee Letter: Previous county mortgage loan limits expired December 31, 2013 Case Number must have been assigned by that date New limits are effective for Case Numbers assigned on or after January 1, 2014 to December 31, 2014 County MSA s determine maximums Continued temporary national limit for Home Equity Conversion Mortgage $625,500

29 2014 Mortgage Loan Limits Mortgagee Letter Lowest county limit $271,050 Highest county limit $625,500 Continued temporary increased ceiling/limit for some counties of Alaska, Hawaii, Guam, and the U.S. Virgin Islands 175% of GSE ($417,000 x 1.75%) = $729,750 Refer to Mortgagee Letter for Streamline Refinances

30 Mortgagee Letter January 2013 Manual Underwriting for Loans With Decision Credit Score Below 620 and Total Debt Ratio Exceeding 43% Effective for Case Numbers assigned on or after April 1, 2013 Manual underwriting required when Borrower(s) FICO score <620 AND Total combined debt ratio (mortgage payment and all other obligations exceeds 43% of total gross effective income Regardless of AUS/TOTAL Scorecard results

31 Manual Underwriting Cont. Also applies to Energy Efficient Mortgage program Exceptions Streamline refinances Home Equity Conversion Mortgages Title I mortgages Borrowers in negative equity position See Mortgagee Letters and

32 Manual Underwriting Cont. All loans must be scored through TOTAL Regardless of manual underwriting requirement Calculation of income, debts, debt-to-income ratio, and compensating factors contained in HUD Handbook Compensating factors must be used and recorded and signed by the Direct Endorsement underwriter

33 Expect More Manual Underwriting Changes Final Notice posted in CFR s 11/pdf/ pdf Estimated announcement mid. to late Jan Estimated to take effect March 2014 Maximum debt ratios to be based on credit score Sets minimum required compensating factors Sets minimum reserve requirement for 1 2 unit properties (3 4 unit reserves remain unchanged)

34 Where to Get More Information CALL - FHA ( ) A source for all FHA questions Lenders and Consumers On-line resource for info about FHA and FHA programs On-line resource for other types of programs, forms, press releases, etc. User friendly HUD owned properties for sale On-line resource to frequently asked questions

35 Additional Useful Web Sites Direct link to confirm a Fannie Mae loan Direct link to confirm a Freddie Mac loan Making Home Affordable Determine a borrower s eligibility Determine if loan is Fannie Mae or Freddie Mac Consumer Financial Protection Bureau California Association of REALTORS

36 Equally Important Numbers Locate a HUD approved housing counseling agency HUD s National Servicing Center FHA insured mortgages only Complaints against mortgage servicers Consumer Financial Protection Bureau RESPA Previously under HUD s oversight Now under Treasury s new agency

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38 HOW REALTORS CAN PREPARE CLIENTS FOR 2014 Kyle Kasperick Senior Lending Manager Chase Jim McCraw Area Lending Manager Citibank

39 Tips for the REALTORS Meet with your lender partners to understand documentation requirements so you can better advise your clients Find out what is most important to your buyers, relating to both the home and affordability Set realistic expectations for buyers especially around timing given the underwriting process to avoid delaying the closing Make sure your buyers are pre-approved early in the shopping process; this will allow the process to run quickly and smoothly when they are ready to secure financing As a listing agent, make sure your buyer is well qualified before accepting the offer

40 Impact to Realtors I believe impact to realtors and purchase transactions at this time is minimal No concern over loans currently in progress as new rules only apply to applications taken on or after January 10, 2014 Most of the loan features that are now unavailable have not been prevalent in the market for years, such as negative amortization or balloon payments I believe lenders will adhere very closely to the 43% debt to income ceiling. Exceptions to that will be much less frequent than in the past, and will be strictly for bank customers I believe it is imperative that borrowers be prequalified with a full underwritten application prior to starting property searches Also think it is important for both the lender and realtor work together to educate the borrowers about new qualified mortgage rules and the impact of changing the financial situation once the prequalified application is approved...example--don't take on new debt, don't miss payments, don't restructure debt during the property search. overall impact: business as usual!

41 Available Resources Chase My New Home mobile application text HOME to Chase (24273) Educational video clips available at Real Estate Connections Educational events and monthly industry updates C.A.R. Finance Helpline

42 Key Take-Aways New QM Guidelines Debt-To-Income Ratio should not exceed 43% Client must meet Ability To Repay requirements must be able to afford the loan Amortization limited to 30 year or less terms No interest only, no negative amortization REALTOR fees not included in the 3% points and fees cap Work with lenders early in the origination process Resources from the lending community, housing agencies and C.A.R. s Finance Helpline are available to you

43 QUESTIONS? FINANCE.CAR.ORG MORTGAGE.CAR.ORG (213)

44 THANK YOU! Finance Helpline CALIFORNIA ASSOCIATION OF REALTORS