Why the Qualified Mortgage could be our best defense against another financial collapse
God bless the Volcker Rule. While it's been out there, taking withering fire from Wall Street's big guns, the hero of the hour has managed to evade the enemy and escape almost unscathed. I'm talking, of course, about the Qualified Mortgage. It's taken some flak from lobbyists and it's the subject of a hearing in the House Financial Services Committee, but otherwise the qualified mortgage is in good shape and ready to defend America.
Q. This is our hero? If so, what exactly is the Qualified Mortgage?
It's a mortgage that will meet certain standards, designed to protect borrowers.
Q. What kind of standards?
For a mortgage to be qualified, it can't include certain features:
- It can't extend more than 30 years.
- If it's larger than $100,000, it can't carry more than 3 percent in upfront points and fees.
- It can't have interest-only payments or payments that are less than the full amount of interest so that the home loan debt grows each month.
- It can't be a "balloon loan", where the borrower has to make a big payment when the loan matures.
- It can't drive a borrower's total debt load above 43 percent of his or her monthly income. (Unless it's backed by Fannie Mae, Freddie Mac, or a federal housing agency like FHA or the VA.)
Q. Sounds good for borrowers. How do lenders feel about it?
Quite positive. Qualified mortgages come with legal protection for lenders, too. Depending on which type of qualified mortgage they make (there are two types), they're insulated frm borrowers filing lawsuits.
Q. Does this mean lenders will be able to get away with anything?
No. If lenders break any consumer law related to the handling of the mortgage etc, they are still liable.
Q. Why does this make the qualified mortgage such a hero?
Because many economists and analysts reckon that the financial crisis was in large part caused by lenders making "toxic" loans to consumers: loans that were almost guaranteed to fail. The qualified mortgage goes a long way from preventing lenders extending loans to anyone with a pulse. It creates a regulatory barrier to indiscriminate lending and reckless borrowing.
Q. But not all the way?
No. Lenders can - and do - still make interest-only loans, and loans that drive the borrowers debt to income ratio above 43 percent. But they won't have robust legal protection from borrowers if things go wrong.
Q. Is it going to be harder to get a loan now?
For someone with poor credit, almost certainly. Although the CFPB says that 92 percent of the mortgages in the market today are qualified mortgage compliant. So we're on the right track. The qualified mortgage is all about keeping us there.