Government sponsored/owned entities Fannie Mae and Freddie Mac have announced that they will no longer be purchasing certain mortgages as directed by their regulator and in compliance with the Consumer Financial Protection Bureau’s (CFPB) qualified mortgage (QM) and Ability-to-Repay (ATR) requirements. This is effective from Jan 10, 2014 and covers the following types of mortgages:
- Interest-only mortgages or those mortgages with a potential for negative amortization. These were highly risky mortgages that allowed borrowers to get larger mortgages and/or lower payments by only making interest payments on their home loans. A lot of these mortgages had a disproportionately high rate of delinquency after the 2007-08 housing market crash
- Mortgages must not have terms in excess of 30 years. Which means no 40-year fixed rate mortgages, which became popular as a way to lower monthly payments, but resulted in a higher overall interest component of the loan
- Mortgages must not have total points and fees in excess of thresholds set by the CFPB. This threshold is currently 3% of the total loan amount
Certain mortgages are exempt, but since Fannie and Freddie securitize over 75% of mortgages, it is likely that the above mortgage offerings will eventually cease to be provided by the downstream banks and other mortgage originators. Which is generally a good thing for the housing market and future home owners.
These all sound like sensible changes. The ‘interest-only’ mortgage in particular was a disaster waiting to happen.