A strange thing happened on Jan. 11, 2014. The sun rose, and the earth continued to spin on its axis. What made this an odd event is that the day before, the rules for Qualified Mortgage (QM) went into effect. By some of the media stories I have read, I’m guessing that surprised some.
However, while the industry is dealing with the new Qualified Mortgage world we live in, one item that is becoming clear is that a lot is still unclear.
The bright lines that we hoped would be drawn haven’t materialized yet. Instead, lenders are left to draw their own conclusions on many items when calculating points and fees, especially when it comes to refundable borrower-paid mortgage insurance single premiums.
The Consumer Federal Protection Bureau (CFPB) declared that any portion up to the FHA upfront MIP of 1.75% may be excluded from the points and fees calculation as long as it is refundable on a prorated basis. Sounded simple enough, but what was not declared is: What is a sufficient prorated schedule?
In October 2013, a member of the CFPB, speaking on a webinar held by the Mortgage Bankers Association, stated that unless the state had another definition, the CFPB considered “prorated” to mean life of coverage. In private mortgage insurance terms, that would mean until the loan reached 78% LTV.
Again, on the surface, sounds simple enough. In fact, some mortgage insurance companies rushed out and created refund schedules that appear to meet that definition. MGIC did not. Why not? Because it is unclear to us how one would calculate the point at which a loan would amortize to 78% without knowing the interest rate on that particular loan.
It is why, when it comes to refundable single premiums, our opinion is that the safest path for lenders is to count the entire amount.
Now to be fair, not everyone in the mortgage industry uses this conservative approach. There are some lenders and investors who are comfortable with allowing the portion of the single premium that is under 1.75% to be excluded when the refund schedule is three or five years.
In which case, they can use MGIC premiums. See, ultimately it is the lender who must decide whether or not a loan is compliant with the QM definition, and how to calculate the points and fees to be QM compliant. Our opinion is merely that, an opinion. But rest assured whether it is borrower-paid singles, lender-paid or standard borrower-paid monthlies MGIC is here to help with your mortgage insurance needs.
We continue to work to wring out the ambiguity associated with this issue. We have had multiple conversations with the CFPB on the matter and will keep working to provide our customers better clarity.
Until then, I’m afraid it is not really a matter of whether the premium is QM-compliant; but rather, how do you view it?
We’d love to hear your point of view on it. Please share your comments below.Tags: FHA, Points and Fees, QM, Qualified Mortgage