On May 6, 2013, the FHFA, the regulator (and conservator) of Fannie Mae and Freddie Mac (the “GSEs”), directed the GSEs to limit their mortgage acquisitions to Qualified Mortgages (or loans that are otherwise exempt from the CFPB’s Ability to Repay Rule), effective January 10, 2014. This FHFA Directive (the “Directive”) will ensure that the GSEs only purchase loans that are fully amortizing, have a term of 30 years or less, and have points and fees limited to 3% of the total loan amount (and meet all the other QM criteria).
As discussed in our May 23, 2013 client alert, the CFPB issued a final rule on January 10, 2013 (the “Final Rule”), later amended on May 29, 2013, defining, among other things, a category of “safe” mortgage loans (i.e., QMs) that will be deemed or presumed to comply with the rule’s complex ability-to-repay requirements. In addition to that standard category of QMs, the CFPB carved out a special category of loans that also will, at least temporarily, enjoy QM status — namely, those eligible for purchase, insurance, or guarantee by specified government agencies, including the GSEs. In order to meet that special temporary QM status, the loans must satisfy the requirements imposed by the respective GSE (or agency), and meet the following additional requirements: (a) contain a maximum loan term of 30 years; (b) not include certain product features like negative amortization or interest only payments; and (c) limit points and fees to 3%. Pursuant to the Final Rule, these temporary GSE/agency QM loans would not need to meet the 43% debt-to-income ratio (“DTI”) limit otherwise required for “standard” QMs; they would, however, need to meet any applicable DTI limits imposed by the GSE or agency, respectively. Most notably, the Final Rule authorizes the GSEs (and other agencies) to craft their own QM definitions, which may be more generous than the standards otherwise set by the “standard” QM definition.
By restricting the GSEs to purchasing only standard QMs (minus the 43% DTI requirement), the FHFA’s May 6 Directive further cements the CFPB’s standard QM as the new baseline for residential mortgage loans. As such, certain GSE requirements that may have made their way into the “special/Agency” QM definition (consider, for instance, a 5% limit on points and fees, as the GSEs otherwise allow) have now been rendered obsolete in the QM context. Thus, while the CFPB’s Director, Richard Cordray, recently stressed that there is “plenty of responsible lending” available outside the QM space, and that lenders “should not be holding back” from originating non-QM loans, the Directive may undermine these comments. That is because, with approximately 50% of residential mortgage loans being backed by the GSEs, creditors that wish to originate non-QM loans will soon be left with even fewer secondary market alternatives.