Almost all VA home loans will be considered Qualified Mortgages that provide lenders a legal safe harbor, according to an interim final rule released last week by the Department of Veterans Affairs.
Under the interim rule, all purchase and refinance loans that receive a VA guaranty would be classified as safe harbor Qualified Mortgages, except for certain VA Streamline refinance loans. That "safe harbor" presumption is designed to shield lenders from legal liability arising from future foreclosure claims.
The rule also seeks to clarify uncertainty regarding Interest Rate Reduction Refinance Loans (IRRRL), the VA's Streamline refinance option that's served as a point of contention among some lenders and industry observers.
The VA's interim rule took effect May 9 and replaces a temporary one in place since January. Wide-ranging reforms in the wake of the housing market collapse created the new class of mortgages (Qualified Mortgages) and a new independent agency to oversee the mortgage industry (the Consumer Financial Protection Bureau). The CFPB issued its own QM guidelines, which include a set of eight credit and underwriting requirements known as the Ability to Repay rule, and permitted government agencies to draft their own rules.
"Veterans, lenders and investors have expressed concern over the applicability and potential effect of CFPB's qualified mortgage definition on the VA Home Loan program," VA officials note in the rule. "Issuing this rule will help to remove these perceptions and allow veterans to continue to utilize the benefit they have earned without bearing the brunt of increasing pricing and limited availability of the VA product."
VA Qualified Mortgages
VA loans were already presumed to be Qualified Mortgages under temporary CFPB rules. But industry insiders and others have been waiting for the Department of Veterans Affairs to issue its own QM guidelines.
Most loans that meet current VA underwriting standards will by definition be considered safe harbor Qualified Mortgages, according to the proposed rule. All qualified mortgages feature key characteristics, which will continue to apply to VA-backed loans:
• Lender verification of assets, credit, employment and other information as part of the Ability to Repay requirements
• No risky features like negative amortization or interest-only payments
• Maximum term of 30 years
• Total points and fees cannot exceed 3 percent
But VA loans will not be subject to the 43 percent cap or to interest rate thresholds that apply to other QM loans. About 15 percent of all VA loans made in 2013 exceeded that 43 percent DTI cutoff, according to the Department of Veterans Affairs.
The Qualified Mortgage designation will also extend to direct loans made to Native American borrowers; to direct loans made in conjunction with a Specially Adapted Housing Grant; and to Vendee loans for the purchase of VA foreclosures.
VA Streamline Refinance
The interim rule also details an important distinction regarding the VA's Streamline refinance program, which is only open to homeowners with VA mortgages. In short, all Interest Rate Reduction Refinance Loans will be considered Qualified Mortgages, but not all IRRRLs will receive the "safe harbor" protection.
For a VA Streamline to be considered a safe harbor Qualified Mortgage, the refinance must meet the following requirements:
• The loan being refinanced was originated at least six months before the new refinance closing date
• The borrower has no 30-day late payments during the six months preceding the refinance closing date
• The time it takes the borrower to recoup all allowable fees and charges financed into the new loan or paid at closing cannot exceed 36 months
• The loan must meet all other VA requirements
Streamlines that fall short of these conditions can still have a "rebuttable presumption" to be Qualified Mortgages. But it's a lesser degree of protection that may discourage lenders from straying from these new safe harbor guidelines.
Consumer advocates had expressed concern about veterans refinancing too quickly into new loans.
"Some borrowers are easily enticed into refinancing their loans simply by understanding that the refinance can lead to two months without making a mortgage payment," the VA rule notes in part. "Other borrowers become fixated on a lower interest rate provided by an IRRRL without understanding that they might not ever recoup their investment of closing costs. By classifying such an IRRRL as a rebuttable presumption qualified mortgage rather than a safe harbor qualified mortgage, VA is providing a disincentive for lenders to make these sorts of loans."
VA officials estimate that only about 4 percent of Streamlines guarantied in 2013 would have failed to meet the proposed requirements.
Income Verification Exemption
The VA will also continue to exempt Streamline refinance loans from many of the income verification requirements other QM loans face.
VA borrowers undergo a full credit and underwriting assessment to secure their original purchase loan. Streamline refinances are "simply improving a borrower's ability to repay a loan that the (VA) Secretary has already guaranteed under more stringent underwriting guidelines," the rule notes in part. These loans don't allow borrowers to get cash back and exist solely to get veterans into lower-rate mortgages or out of adjustable-rate loans.
Allowing lenders to bypass income verification can save veterans both time and money. VA estimates the average Streamline closing would have taken two to four weeks longer last year if lenders had been required to verify income as they do on purchase loans.
All seven of these requirements must be met in order for lenders to skip income verification on a VA Streamline:
• The borrower is not 30 days or more past due on the loan being refinanced
• The Streamline refinance doesn't increase the principal balance except for the financing of allowable costs and fees
• Total points and fees can't exceed 3 percent
• The Streamline interest rate is lower than the rate on the loan being refinanced, unless the borrower is refinancing out of an adjustable-rate mortgage
• The Streamline refinance will have a fully amortizing payment schedule
• There's no balloon payment due at some point
• All other VA requirements are met
Lenders will have to document and verify the borrower's income if any of these conditions aren't met.
"VA's goal through this rulemaking is to protect the integrity of the Home Loan program and provide veterans an assurance that they are truly improving their financial position when proceeding with an IRRRL," the rule notes in part. "The seasoning and recoupment requirements discussed above, as well as the income verification exemption provided when certain criteria are met, all serve to further this goal."
There is a 30-day window for the public to provide comment on the interim rule.
Chris Birk is director of communications for the VA Mortgage Center, which specializes in VA loans for veterans and active duty service members.