Proposed self-employment mortgage act will allow risky loans

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary

From Freddie Mac’s weekly survey: The 30-year fixed rate averaged 4.52 percent, up one basis point from last week’s 4.51 percent.  The 15-year fixed averaged 3.97 percent, one basis point better than last week’s 3.98 percent.

The Mortgage Bankers Association reported a 1.7 percent decrease in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $453,100 loan, last year’s payment of $2,116 was $185 lower than this week’s payment of $2,201.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages for a one-point cost: A 15-year at 3.50 percent, a 30-year at 4.0 percent, a 15-year high-balance ($453,101 to $679,650) at 3.625 percent, a 30-year high-balance at 4.25 percent, a 15-year jumbo (over $679,650) at 4.0 percent and a 30-year jumbo at 4.375 percent.

What I think: This week, U.S. Sens. Mark Warner of Virginia and Mike Rounds of South Dakota introduced legislation named the Self-Employment Mortgage Access Act of 2018.

This legislation will fix some flaws that were part of the 2010 Dodd-Frank Act, making it easier for self-employed borrowers using alternative income sources to qualify for a mortgage.

“We aren’t loosening qualifying standards at all, just expanding the range of documents that can be used to prove income/debt,” said Nelly Decker, press secretary to U.S. Senator Mark Warner.

Nothing wrong with this in theory. But there is a lot more to this if we dig deeper.

First, a little history about how this came about.

Simply stated, Dodd-Frank offered mortgage lenders a safe harbor against getting in trouble for making bad loans so long as those loans were approved by running them through Fannie Mae’s or Freddie Mac’s underwriting engines (which also facilitate FHA and VA automated approvals).

This is called the Qualified Mortgage Rule. It means the lender followed the rules showing that you really do have the ability to repay the mortgage even when your total house payment and other bills exceeded 43 percent of your monthly gross income.

If you don’t fit that bucket, lenders could still make lend you money under rules found in the Consumer Financial Protection Bureau’s Appendix Q. It is more involved for the lender to document and defend your ability to repay. And there is no automatically assumed safe-harbor.

Lenders are cautious about making non-QM loans because a failing borrower could drag a lender into court and force it to rescind the loan.

That means the lender would have to refund the closing costs and the payments the borrower made if the lender can’t convince the judge that the borrower was, in fact, able to pay.

Anything over $453,100 in Riverside and San Bernardino counties and over $679,650 in Orange and Los Angeles counties is considered a jumbo loan. Jumbo loans are over the loan limits and can’t be considered under the Qualified Mortgage Rule.

Under this proposed legislation, a lender could use Fannie, Freddie, FHA, VA and USDA guidance to justify any loan approval outside of today’s QM box and not be burdened with that non-QM document and defend liability.

The purpose of the legislation is to allow lenders to securitize jumbo loans and go over the 43 debt-to-income limitation, said Pete Mills, senior vice president of residential policy at the Mortgage Bankers Association. Today, lenders largely sell non-QM loans one at a time.

That all seems simple and safe until you consider the implications. You could take a $1 million property using FHA underwriting guidance, a 3.5 percent down payment ($35,000) and a 590 middle FICO credit score and call it safe!

The offices of both Warner and Rounds made it clear to me these proposed rules are not all-inclusive. So, what happens if government guidance eventually allows bank statement or even stated-income loans that are easily obtained today in the non-QM world?

Then, of course, you could package a bunch of these loans into mortgage-backed securities and sell them to suckers across the country and around the world and call them safe because the U.S. government said so. Back to the future.

Mortgage broker Jeff Lazerson can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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