August 12, 2019
What is the Ability to Repay and Qualified Mortgage Rule (QM) Patch?
When Congress modified the Truth in Lending Act (via section 1402 of Dodd-Frank) as a response to the 2008 housing crisis under the belief that it was caused by mortgage issuers offering mortgages to people unable to afford them, one element was intended to implement a “qualified mortgage rule”—which was a number of minimum standards that had to be met in order that a mortgage could be issued.
Among these standards were:
- The “Ability-to-Repay” requirement, which makes regulators create and enforce rules so that “no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan.”
- The “safe harbor and rebuttal presumption,” which allows a lender to presume that a mortgage fulfills the Ability-to-Repay requirement so long as the loan is a qualified mortgage.
Regulators were given a great deal of latitude to determine what could be considered a qualified mortgage in the residential market. But the Consumer Protection Bureau recognized that skittishness in the real estate market following the crisis might mean that meeting full qualifications for a qualified mortgage might prove problematic at first, so it created a second class of qualified mortgage—one for which people could still qualify even if their debt-to-income ratio exceeded 43 percent. This type of mortgage is referred to as “the patch.”
A recentreport by the American Enterprise Instituteargues that this patch is problematic in today’s market. Not only has it permitted lenders to move forward with loaning to people with high debt-to-income ratios, upon whom the current housing boom is being built, but it has managed to exacerbate problems in the starter home market. The patch is set to expire in 2021—and this report argues that it should be allowed to do so, such that the market can readjust to fully qualified mortgages and not create a new bubble.
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