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Changes for 2014 Affecting Mortgage Loans

Happy New Year! Several changes will be occurring this month that may impact loan availability for many potential homeowners in 2014. Here is a summary of some of the changes.

New Loan Limits for FHA Loans
Higher FHA limits have been in place for six years and established by the Economic Stimulus Act of 2008 as emergency measures to assure that mortgage credit was widely available during a time when private lending options were severely constrained. The lower loan limits were originally scheduled to take effect in January 2009, but Congress delayed implementation several times.

As of January 1, 2014, the following limits will be in place for FHA single family loans:

• National ceiling limit for highest cost areas will be reduced from $729,750 to $625,500

• Caps for Two units: $347,000 (low-cost area cap) and $800,775 (high-cost area cap)

• Caps for Three units: $419,425 (low-cost) and $967,950 (high-cost)

• Caps for Four units: $521,250 (low-cost) and $1,202,925 (high-cost)

The standard loan limit for areas where housing costs are low will remain at $271,050, while the ceiling for FHA-insured reverse mortgages will stay at $625,500. Approximately, 650 counties will face lower loan limits when the standard takes effect.

CFPB New Mortgage Rules
As of January, 2014, the following mortgage rules implemented by the Consumer Federal Protection Bureau (CFPB) as part of the Dodd-Frank Act will go into effect.

  • Ability to Repay / Qualified Mortgage Rule:  effective January 10, 2014
  • High Cost Mortgage and Homeownership Counseling Rule:  effective January 10, 2014
  • Servicing Management Rule:  effective January 10, 2014
  • Appraisals for Higher Priced Mortgage Loans:  effective January 18, 2014
  • Disclosure and Delivery Requirements for Appraisal Rules:  effective January 18, 2014

The High Cost Mortgage Rule and the two rules regarding Appraisals are primarily related to additional or modified disclosures and delivery of valuation documents to the consumer.  And, the Servicing Management Rule formalizes best practices for implementation by all servicers, much of which is related to error resolution, early intervention and continuity of contact with delinquent consumers, and loss mitigation.

The most impactive of these rules is the Ability to Repay / Qualified Mortgage Rule, generally referred to as ATR / QM by the industry.

Qualified Mortgage Rule
The ATR / QM Rule requires that a lender make a good-faith determination that the consumer has a reasonable ability to repay the loan.  While there are many components to the ATR / QM Rule, in order for a loan to be considered a “Qualified Mortgage”, it must include the following components:

  • Restrictions on product features:  No negative amortization, interest only or balloon payments; no terms exceeding 30 years; restrictions on prepayment penalties.
  • Limitations on points and fees paid:  Generally limited to 3% of the total loan amount, as defined by the CFPB, with lowered limits on loan amounts less than $100,000.
  • Limitations on debt-to-income ratios:  Limited to 43% or less, UNLESS the loan is approved by Fannie Mae, Freddie Mac or VA (“Temporary QM”), approved by FHA (“FHA QM”) or if it is a bond loan.
  • Documentation standards:  Ability to repay must be appropriately documented, meaning no more no doc or limited doc loans.

Since the ATR / QM Rule extends QM status to loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac or for insurance or guarantee by FHA or VA, most lenders believe that the vast majority of their loans fall into the QM category.

Non-Qualified Mortgages
Most lenders will originate Non-QM or ATR loans (loans that fall outside of the QM definition), as long as they have investors willing to purchase such loans.

Educational Materials
The CFPB has released a number of compliance aids and notices to assist in the industry’s understanding of the new rules.  Please visit http://www.consumerfinance.gov/mortgage-rules-at-a-glance/ to access guides, videos and the rules themselves.

Disclaimer: This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal or accounting advice or other expert assistance is required, the services of a competent professional should be sought.

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