How qualified is your qualified mortgage?

by. Henry Meier

This is a story about Jack and Diane; two American kids who lost touch after a sordid affair in High School. Each of them go to college, get a job, and are now ready to claim their piece of suburbia by buying their first house.

Jack gets his mortgage from a credit union with assets over $2 billion dollars. Diane gets hers from a small credit union with assets over $25 million. Both of the credit unions make qualified mortgages (QM) to enthusiastic first time homebuyers. This means, among other things, that Jack’s mortgage doesn’t exceed a 43% debt- to-income ratio and his credit union adhered to the prescribed underwriting requirements mandated by Appendix Q. Jack’s credit union had its mortgage department document the borrowers information (remember, the days of the liar loan are over).

Our small credit union gives a QM mortgage to Diane. It also does everything right. It’s a lot easier for it to make a QM loan. For example, Diane had a debt to income ratio around 50%, but the D-T-I cap doesn’t apply to small lenders. Student loans for a Masters in Acting can pile up, but the credit union knows Diane and has made similar loans in the past. Besides, the credit union’s “mortgage department” consists of Bill, a 30 year veteran of making mortgages in the area who has internalized the credit union’s lending parameters but has never had the time or seen the need to translate this knowledge into policies or procedures.

Eighteen months go by and both credit unions have had to start foreclosures. Dodd-Frank has made foreclosure defense a profitable legal specialty, so both Jack and Diane have retained counsel. Both borrowers claim that they have a valid defense to foreclosure because both credit Unions violated Dodd-Frank in being foolish enough to give either of them a loan.

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