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Capital Economics Says QM Rules Won’t Hinder Recovery

The long-awaited definition of the ""Consumer Financial Protection Bureau's"":http://www.consumerfinance.gov/ (CFPB) ability to repay rule and qualified mortgage standards ""have been unveiled"":http://dsnews.comarticles/cfpb-releaes-long-awaited-qualified-mortgage-rule-2013-01-10, and ""Capital Economics"":http://capitaleconomics.com/ says the new rules ""will not hamper the housing recovery.""


Previously, some concern circulated the industry that the qualified mortgage rule would be too limiting, possibly shutting reasonably safe borrowers out of the market and stalling a market recovery.

However, Capital Economics says ""the qualified mortgage guidelines don't look overly onerous.""

Furthermore, the analytics firm suggests, ""it's worthwhile asking whether these new rules are excessively permissive.""

The CFPB's ability to repay rule requires lenders to verify borrowers meet certain minimum requirements, taking into account credit history, total debt, employment status, income, and assets.

However, the rule does not set specific underwriting rules or impose precise loan-to-value or loan-to-income ratios.

One way of meeting the ability to repay rule--writing a qualified mortgage--does, however, require a debt-to-income limit. The rule requires borrowers to have debt payments of no more than 43 percent of their gross income.


A second way to meet the ability to repay rule is to follow the underwriting guidelines of Fannie Mae and Freddie Mac.

However, this rule ""doesn't sit comfortably with the widespread conviction among policymakers that Fannie Mae and Freddie Mac's role in the housing market needs to be reduced or even eliminated completely,"" according to Capital Economics. Some fear this rule could create more dependence on the GSEs.

Loans that will not qualify as qualified mortgages include negative amortization, interest only, balloon loans, no-doc loans, and loans exceeding 30 years. These loans can still qualify for the ability to repay rule.

However, Capital Economics finds it ""unlikely"" lenders will write these types of loans much in the near future.

Writing qualified loans prevents lenders from facing legal accusations of shoddy underwriting in the future.

Capital Economics finds the CFPB's rules broad enough not to choke off any recent progress toward recovery.

""Mortgage-dependent buyers aren't playing much of a role in the recovery for now anyway,"" Capital Economics states. ""But when they do return in greater numbers, a requirement that they are demonstrably able to repay loans will not be a bad thing.""

As to whether the new rules are ""excessively permissive,"" Capital Economics points out that the CFPB neglected to prescribe exact credit score, income, or deposit requirements, and the soundness of the concessions for GSE underwriting standards is questionable. The peak delinquency rate of GSE loans during the crisis was not much lower than that of the market as a whole.

However, ""we think that the CFPB has walked the tight-rope pretty well,"" Capital Economics states.


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