rlclarey, I was referring to your quote regarding balloon payments above in which you referenced the 2009 Federal caletter. I just wanted to know if the 2009 clarification for balloon payments is carrying over to the ATR going into effect in 2014?

amicomply - the 2009 guidance will be good until Jan 2014. After that, the new rules are going to be what governs.

I think you're right raitch. If your balloon term is at least 61 months, you should not need to consider the balloon payment in the DTI.

Thanks Joker. All the cross-referencing in Reg. Z drives me nuts.

There is so much regurgitation. It's so sad when you can take 804 pages and break it down to 4.

Right there with you raitchjay and Joker!

After following this discussion closely, winding my way through the final rule itself, and reading as many of the publicized "summaries" currently online; I think I am about ready to give our Director's Loan Committee the bad news. I am the risk manager at a small ($350M) bank with 7 branches located in a Texas MSA.

Our Bank has a mortgage "department" doing primarily FHA loans which we sell on the secondary market. These are fully GSE underwritten and so I foresee no problems with their being fully protected QM's. However, the "retail" side of our Bank accomodates those customers whose loans will not, for one reason or another, qualify for sale to that market, and are therefore retained in the Bank's portfolio. Over the years, and after much discussion, we book those credits as 3 year balloons. Our practice is then to renew at the balloon, although the contract specifies that renewal is not guaranteed.

Our objective is to control our credit and interest risk for S&S purposes. Although we feel these credits have been well underwritten, allowing the Bank to make credit available to a larger group of consumers, the balloon feature now places us in the "crosshairs" for future litigation. I know that a large number of community banks our size use the 3-5-7 years balloons in order to accomplish what our regulators have pounded into us - manage risk.

What will Banks in our situation do? We are not going to make 30 yr fixed rate loans to retain in our portfolio, and the risk involved in continuing as we have and depending on our underwriting seems great. Any others out there in a similar situation see a solution I am missing?

Yes...we have a similar problem, however currently we qualify as rural, so we can continue to make balloon's..they'll just be longer (61 months)

I'm wondering about modifications on maturing loans currently in portfolio to keep that shorter maturity for interest rate risk purposes and have a question out there in the lending forum on whether doing so can be done and remain outside of the 'refinance' definition.

I've never seen anything but a vague non-answer given on this matter, so I'm hoping I can get a concrete one one way or the other!

Joker....why 61 months? Doesn't the rule simply say 5 years or longer?

Because on a balloon note for any less than 61 months, you would have to take into consideration the balloon payment in the ability to repay calculation.

I guess that's what i'm asking...i thought the rule just said at least 5 years, not over 5 years.

The five year period does not start at consummation:

The following are examples of how to determine the maximum payment scheduled during the first five years after the date on which the first regular periodic payment will be due....

Ok...i'll check those examples out. Thanks.

Pg 751 gives examples when you must use the balloon payment in underwriting. We currently meet the definition of rural and will most likely be extending our 5 year balloon to over 61 months. Right now we are looking at a 6 year balloon or may just go with a our 7 year. We haven't decided yet.

What Randy said is the key...your count doesn't start at consummation...it starts with your first payment. Therefore, just like the 7-yr presumption for HPML's..technically, you need an 85 month term to accomplish that.

Sapaudit, we're in a similar boat. Anyone we can't put through secondary market we would try to keep on our books with a balloon until they could qualify for secondary market. As far as I can tell our only option is to offer ARMs.

Ok, so if i'm understanding what i've read so far correctly, an HPML can be a QM, but it must also meet this requirement:

4) Qualified mortgage defined—special rules. (i) General. Notwithstanding paragraph (e)(2) of this section, a qualified mortgage is a covered transaction that satisfies:

(A) The requirements of paragraphs (e)(2)(i) through (iii) of this section; and

(B) One or more of the criteria in paragraph (e)(4)(ii) of this section.

(ii) Eligible loans. A qualified mortgage under this paragraph (e)(4) must be one of the following at consummation:

(A) A loan that is eligible:

(1) To be purchased or guaranteed by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation operating under the conservatorship or receivership of the Federal Housing Finance Agency pursuant to section 1367(a) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617(a)); or

(2) To be purchased or guaranteed by any limited-life regulatory entity succeeding the charter of either the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation pursuant to section 1367(i) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617(i));

(B) A loan that is eligible to be insured by the U.S. Department of Housing and Urban Development under the National Housing Act (12 U.S.C. 1707 et seq.);

(C) A loan that is eligible to be guaranteed the U.S. Department of Veterans Affairs;

(D) A loan that is eligible to be guaranteed by the U.S. Department of Agriculture pursuant to 42 U.S.C. 1472(h); or

(E) A loan that is eligible to be insured by the Rural Housing Service.

I understand it doesn't actually have to be purchased or guaranteed by the entities listed, only eligible. But Fannie and Freddie are out as they won't buy HPMLs. I know nothing about getting loans eligible for the guarantees/insurance listed for the VA, HUD, USDA, etc. How does a person go about proving this eligibility?

RJ,
From my understanding, a HPML will be a QM if it meets the 6 factors listed under the QM definition. The eligibility piece you refer to is a sunsetting provision that allows to you skip/avoid the 43% DTI factor if the loan is eligible for purchase. The sunset must end in 2021 but the CFPB can end sooner.

I guess for high DTI loans you can run them through DU/LP and see if they will be eligible, but like you said if it's HPML and hight DTI it's not likely they will be eligible.

Ok....so if you meet the rural/underserved exemption, that would remove you from the 43% DTI piece anyway and make the part i quoted pretty much moot for a rural/underserved bank....correct?

I think the above was to accomodate GSEs? that use another underwriting guideline other than DTI (such as VA residual income).

For rural/underserved, they won't hold you to 43%, but I'd venture to say you best have prudent guidelines of some similiar %. Most particularly if you make a HPML QM and only have rebuttable presumption.

Rather than moving into deeper waters with ARMs, it would seem to be easier to offer a fully amorting loan of say up to 85mo. or 84 with a balloon. What do you do with loans maturing in the portfolio? Refinancing in the secondary market is not possible. What then?

"consumers can bring an action against the lender at any point during the first three years of the loan or as an offset to foreclosure at any time. In the latter cases, the recovery of interest and finance charges is capped at the amount paid during the first three years."

Can someone please give me the location of the above quote? I'm needing it for a report i'm doing. Thanks.

pg 583 of preamble to QM/ATR rule

If you aren't rural, you won't have a QM if you do this. I think that's what CB was referring to. Also, if you had a fully amortized loan, you wouldn't have a balloon.

Thank you ahou!