As anticipated, HUD recently issued its proposed rule defining a qualified mortgage (QM) for HUD insured and guaranteed single family mortgages. Under the proposed rule, published in the Federal Register on Monday, Title II single family mortgages that do not meet the points and fees requirement under the CFPB’s general QM definition will not be eligible for insurance under the National Housing Act (not including HECMs).
Keeping in line with the CFPB’s QM definition, HUD’s proposed rule defines both a safe harbor QM and a rebuttable presumption QM. Further, as stated above, HUD’s QM definition also adopts the points and fees limitation scale from the CFPB’s final rule.
The significant departure from the CFPB’s definition is the way in which HUD differentiates the APR dividing line between safe harbor and rebuttable presumption QMs. Under HUD’s proposed rule, for a Title II single family loan to be a safe harbor QM, the loan must have an APR that does not exceed the average prime offer rate (APOR) for a comparable mortgage, as of the date the interest rate is set, by more than the combined annual mortgage insurance premium (MIP) and 115 basis points for a first-lien mortgage. QM loans with higher APRs would qualify for the rebuttable presumption. In contrast, under the CFPB’s approach to QMs, a first-lien loan must have an APR that is lower than 1.5 percentage points over the APOR to fall within the safe harbor. By basing the APR cap for safe harbor loans on a combination of basis points plus annual MIP, the proposed rule alleviates concerns over the premiums kicking APR for many loans above the safe harbor cap under the CFPB’s approach to QMs.
Apparently HUD believes that on average the annual MIP will add approximately 135 basis points to the APR. Effectively, the proposal would permit on average an FHA loan with an APR no more than 2.5 percentage points above the APOR to fall within the safe harbor. However, based on complexities associated with calculating the safe harbor based on a combination of basis points plus the annual MIP, the industry may well request HUD to adopt a simpler approach that uses a single percentage point amount, such as 2.5 percentage points, and not a combination of basis points and the annual MIP.
The proposed rule also designates Title I (home improvement loans), Section 184 (Indian housing loans), and Section 184A (Native Hawaiian housing loans) insured mortgages and guaranteed loans, covered by the rulemaking, to be safe harbor qualified mortgages.
Please note that HUD has provided a short, 30-day comment period for the proposed rule. Comments are due on or before October 30th.