Why Haven’t Loan Officers Been Told These Facts?
General Qualified Mortgage Confusion
Each year, the Loan Officer School, the LOSJ’s parent organization, partners with thousands of mortgage originators to help them meet their annual continuing education requirements. Through this collaboration, we gain valuable insights into what loan officers understand and where they need clarification.
We have learned that there is still confusion about the “new” 2021 General Qualified Mortgage (QM) final rule. The QM requirements are established by the Consumer Financial Protection Bureau (CFPB), which administers the Truth in Lending Act (TILA) under Title 12 of the Code of Federal Regulations (§ 1026.43 Minimum standards for transactions secured by a dwelling), commonly referred to as Regulation Z.
Qualified Mortgage Advantages
§ 1026.43(e)(1) (i) Safe harbor for loans that are not higher-priced covered transactions and for seasoned loans. A creditor or assignee of a qualified mortgage complies with the repayment ability requirements if the loan is 1) A qualified mortgage that is not a higher-priced covered transaction or 2) A seasoned qualified mortgage regardless of whether the loan is a higher-priced covered transaction.
Lenders benefit from making Qualified Mortgage (QM) loans because they receive a non-rebuttable presumption of compliance with the Truth in Lending Act (TILA) Ability to Repay (ATR) requirements for Non-Higher-Priced Mortgage Loans. In contrast, Higher-Priced Mortgage Loans that qualify as QM loans have a rebuttable presumption of ATR compliance. This means that if a challenge arises, the lender must defend its reasonable determination of the applicant’s ability to repay the loan in a legal proceeding. This exposes the lender to significant legal risks, including potential violations of TILA and the Consumer Financial Protection Act of 2010 (Title X, Dodd-Frank). Because of these risks, most lenders today tend to avoid subprime (non-QM) lending.
The term “nonrebuttable” refers to a situation in which the lender is not required to defend its credit decision in any legal proceedings. According to Black’s Law Dictionary, a “safe harbor” is a provision in a law or agreement that protects a party from liability or penalties, provided certain conditions are met (Regulation Z QM requirements).
The Latest General QM Rule
On April 27, 2021, the Consumer Financial Protection Bureau (CFPB) issued a final rule (Regulation Z, “the April 2021 Final Rule”) extending the mandatory compliance date of the General Qualified Mortgage (QM) Final Rule from July 1, 2021, to October 1, 2022.
The April 2021 Final Rule also impacted the expiration of the Temporary GSE QM loan definition or “Patch.” Under the April 2021 Final Rule, the Temporary GSE QM loan definition also expired on October 1, 2022.
The April 2021 General QM Final Rule replaced the existing 43 percent debt-to-income ratio limit in the General QM definition with price-based (APR) thresholds. Before the final rule, for a residential mortgage loan to fit within the General QM category, the ratio of the consumer’s total monthly debt to total monthly income (DTI ratio) could not exceed 43 percent. The lender had to calculate, consider, and verify the consumer’s debt and income to determine the consumer’s DTI ratio under the standards in Appendix Q of Regulation Z.
With the Final Rule, Appendix Q was removed from Regulation Z. Appendix Q primarily used FHA underwriting standards to establish the 43% debt-to-income (DTI) ratio.
The GSE Patch
The second, temporary category of QMs consisted of residential mortgage loans that, among other things, were eligible for purchase or guarantee by Fannie Mae or Freddie Mac. That temporary category of QMs was sometimes referred to as the “Temporary GSE QM” category or as the “GSE Patch” and is no more.
FHA, VA, and USDA write their own QM requirements (regulations). Consequently, it was primarily non-conforming residential transactions that were subject to the old 43% DTI limit. Consequently, non-government agency-styled transactions are now subject to the General QM requirements.
The General QM Requirements
A loan meets the revised General QM definition only if the annual percentage rate (APR) exceeds the average prime offer rate (APOR) for a comparable transaction by less than the applicable threshold set forth in the General QM Final Rule as of the date the interest rate is set. Generally, this threshold is 2.25 percentage points. However, the General QM Final Rule provides higher thresholds for loans with smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions.
For more information on APOR, see the link at the end of the article. Every year, the price thresholds are adjusted for inflation using the consumer price index. The 2026 APR thresholds set forth in the General QM Final Rule are:
- For a first-lien covered transaction with a loan amount greater than or equal to $137,958, 2.25 percentage points over APOR
- For a first-lien covered transaction with a loan amount greater than or equal to $82,775 but less than $137,958, 3.5 percentage points
- For a first-lien covered transaction with a loan amount less than $82,775, 6.5 percentage points
- For a first-lien covered transaction secured by a manufactured home with a loan amount less than $137,958, 6.5 percentage points
- For a subordinate-lien covered transaction with a loan amount greater than or equal to $82,775, 3.5 percentage points
- For a subordinate-lien covered transaction with a loan amount less than $82,775, 6.5 percentage points
If a loan’s interest rate may or will change in the first five years after the date on which the first regular periodic payment will be due, the creditor must treat the highest interest rate that may apply during that five years as the loan’s interest rate for the entire loan term when determining the APR for purposes of these thresholds. Additional information on determining the APR, the APOR, and the applicable threshold is available in the General QM Final Rule.
BEHIND THE SCENES: Underwater Mortgages, Credit Tightening, Declining Markets
Underwater Mortgages
According to the data solutions firm ATTOM, a mortgage is classified as seriously underwater when the combined estimated loan balances surpass the property’s estimated market value by at least 25 percent.
In the article “Seriously Underwater Mortgages – Q4 2025 State Rankings,” ATTOM reports that although the overall percentages of seriously underwater mortgages remain relatively low and stable, certain regions warrant closer scrutiny.
Growing Concerns
In December 2025, the ICE Monthly Mortgage Monitor reported that the increase in foreclosures is largely due to a growing number of FHA loans becoming seriously delinquent. Nearly 12% of all outstanding FHA loans are currently delinquent, resulting in more serious delinquencies being referred for foreclosure.
In HUD’s most recent Annual Report to Congress, the report expresses concern about rising Debt-to-Income (DTI) ratios, along with other risk factors that indicate potential increases in losses. Be on the lookout for possible credit tightening related to these risk layers. Loans with risk layers experience an average loss rate 2.5 times higher than that of the rest of the HUD-insured single-family portfolio.
FHA Risk Analysis
FHA risk identification practices identify, categorize, and evaluate both individual threat risks and overall threat risks. An individual risk refers to a specific threat, such as a high debt-to-income (DTI) ratio. In contrast, total risk, also known as layered risk, represents the combined effect of multiple risks, including a low credit score, a high DTI, and insufficient cash reserves. It is essential for lenders to implement comprehensive total risk management. This assessment begins with evaluating specific underwriting criteria. The FHA identifies the following risk factors as the most significant for predicting potential losses:
1) Credit Scores
2) Loan-to-Value Ratios (LTVs)
3) Debt-to-Income Ratios (DTIs)
From the annual report, HUD indicates that credit scores, the most predictive factor, have been increasing over the past four years, reaching ten-year highs with average credit scores of 679. The increase in average credit scores is a favorable development that, by itself, lowers claim risk exposure as higher credit score borrowers are less likely to default and require FHA to make a claim payment.
DTI ratios, another risk determinant, have experienced the opposite trend to credit scores. Average DTIs have risen from 40 percent to 45 percent over the past fifteen years, though they have remained stable over the past three years.
Risk Mitigation
One of the challenges in data analysis is quantifying the impacts of variable inputs, such as cash reserves and DTI. Studies indicate that cash reserves lower performance risk.
Mortgage originators need to understand their lenders’ risk appetites and mitigate risks whenever possible. This is a traditional approach that requires compensating factors for known risks.
What This Means to Originators
Compensate or mitigate risk:
- Assist customers with credit score management to improve their credit scores.
- Arrange down payment assistance to improve cash reserves.
- When appropriate, use discounted adjustable-rate mortgages (ARMs) to lower the debt-to-income (DTI) ratio.
From the 4000.1
II. ORIGINATION THROUGH POST-CLOSING/ENDORSEMENT
A. 8. Title II Insured Housing Programs Forward Mortgages
Programs and Products – Section 251 Adjustable Rate Mortgages (05/02/2023)
vii. Underwriting Requirements
The Mortgagee must underwrite the Mortgage based on payments calculated using the initial interest rate (except for a 1-year ARM).
For 1-year ARMs, if the Loan-to-Value (LTV) is 95 percent or more, the Mortgagee must underwrite the Mortgage based on payments calculated using the initial interest rate plus one percent. If the Mortgage is less than 95 percent, the Mortgagee must underwrite the Mortgage based on payments calculated using the initial interest rate.
From the ATTOM Underwater Mortgages Article
Conclusion
“The findings indicate that seriously underwater mortgage rates continue to remain low across the U.S., and despite year-over-year shifts in certain states, homeowner equity levels overall remain relatively stable.”
Percentage of Seriously Underwater Rates by State – Q4 2025
Below is the complete state-by-state ranking for the fourth quarter of 2025, listing each state’s share of seriously underwater properties and the top four counties with the highest percentages of seriously underwater homes.
1. Louisiana
10.7% seriously underwater, down from 11.2% last quarter and up from 9.5% last year
Counties: Vernon, De Soto, Calcasieu, Webster
2. Mississippi
8.3% seriously underwater, up from 6.6% last quarter and up from 6.4% last year
Counties: Lauderdale, Washington, Pike, Lafayette
3. Kentucky
7.9% seriously underwater, up from 6.0% last quarter and up from 6.1% last year
Counties: Pike, Adair, Floyd, Greenup
4. Iowa
5.8% seriously underwater, up from 5.6% last quarter and up from 5.3% last year
Counties: Lee, Tama, Henry, Wapello
5. Arkansas
5.6% seriously underwater, down from 5.7% last quarter and up from 5.3% last year
Counties: Columbia, Poinsett, Union, Conway
6. Oklahoma
5.4% seriously underwater, up from 5.4% last quarter and up from 4.9% last year
Counties: Pontotoc, Pittsburg, Woodward, Beckham
7. Kansas
5.3% seriously underwater, up from 4.5% last quarter and up from 4.4% last year
Counties: Finney, Leavenworth, Johnson, Wyandotte
8. Illinois
4.7% seriously underwater, up from 4.2% last quarter and up from 4.5% last year
Counties: Mcdonough, Saline, Marion, Montgomery
9. Missouri
4.6% seriously underwater, up from 4.4% last quarter and up from 4.5% last year
Counties: Dunklin, Butler, Saint Louis City, Scott
10. West Virginia
4.4% seriously underwater, up from 3.9% last quarter and up from 3.9% last year
Counties: Harrison, Mercer, Wayne, Cabell
11. Nebraska
4.2% seriously underwater, up from 3.9% last quarter and up from 3.8% last year
Counties: Scotts Bluff, Gage, Madison, Otoe
12. North Dakota
4.2% seriously underwater, down from 4.7% last quarter and down from 4.7% last year
Counties: Richland, Stark, Stutsman, Williams
13. Ohio
4.0% seriously underwater, up from 3.6% last quarter and up from 3.7% last year
Counties: Pike, Coshocton, Belmont, Lawrence
14. Pennsylvania
3.9% seriously underwater, up from 3.8% last quarter and up from 3.5% last year
Counties: Elk, Greene, Jefferson, Northumberland
15. Maryland
3.7% seriously underwater, up from 3.5% last quarter and up from 2.6% last year
Counties: Baltimore City, Dorchester, Somerset, Wicomico
16. Alabama
3.6% seriously underwater, up from 3.4% last quarter and up from 3.2% last year
Counties: Pike, Tuscaloosa, Geneva, De Kalb
17. Georgia
3.5% seriously underwater, down from 3.6% last quarter and up from 2.8% last year
Counties: Grady, Coffee, Decatur, Muscogee
18. Wisconsin
3.4% seriously underwater, up from 3.3% last quarter and up from 3.2% last year
Counties: Rusk, Taylor, Monroe, Jackson
19. South Carolina
3.4% seriously underwater, up from 3.0% last quarter and up from 2.8% last year
Counties: Darlington, Jasper, Aiken, Clarendon
20. Tennessee
3.4% seriously underwater, up from 3.1% last quarter and up from 2.8% last year
Counties: Haywood, Lauderdale, Smith, Overton
21. Indiana
3.3% seriously underwater, up from 3.0% last quarter and up from 2.7% last year
Counties: Miami, Perry, Vanderburgh, Spencer
22. New Mexico
3.0% seriously underwater, up from 2.8% last quarter and up from 2.4% last year
Counties: Roosevelt, Eddy, Rio Arriba, Lea
23. South Dakota
2.9% seriously underwater, down from 3.0% last quarter and down from 3.2% last year
Counties: Yankton, Union, Minnehaha, Meade
24. North Carolina
2.9% seriously underwater, up from 2.6% last quarter and up from 2.4% last year
Counties: Surry, Vance, Edgecombe, Robeson
25. Minnesota
2.8% seriously underwater, up from 2.6% last quarter and up from 2.5% last year
Counties: Koochiching, Faribault, Hubbard, Wadena
26. Michigan
2.8% seriously underwater, up from 2.5% last quarter and up from 2.5% last year
Counties: Gogebic, Cass, Branch, Genesee
27. Colorado
2.7% seriously underwater, up from 2.6% last quarter and up from 2.2% last year
Counties: Otero, Las Animas, Rio Grande, Logan
28. Utah
2.6% seriously underwater, up from 2.5% last quarter and up from 2.5% last year
Counties: Washington, Sevier, Iron, Wasatch
29. Idaho
2.6% seriously underwater, up from 2.5% last quarter and down from 2.7% last year
Counties: Shoshone, Valley, Franklin, Cassia
30. Delaware
2.5% seriously underwater, down from 2.6% last quarter and up from 2.3% last year
Counties: Kent, Sussex, New Castle
31. Virginia
2.4% seriously underwater, up from 2.1% last quarter and up from 1.9% last year
Counties: Greene, Fluvanna, Charlottesville City, Albemarle
32. Wyoming
2.3% seriously underwater, up from 2.2% last quarter and down from 2.4% last year
Counties: Carbon, Converse, Uinta, Campbell
33. Texas
2.3% seriously underwater, up from 2.3% last quarter and up from 2.1% last year
Counties: Gray, Howard, Cass, Polk
34. Florida
2.3% seriously underwater, up from 2.0% last quarter and up from 1.6% last year
Counties: Charlotte, Hardee, Jackson, Gadsden
35. Maine
2.2% seriously underwater, up from 2.1% last quarter and up from 1.8% last year
Counties: Washington, Aroostook, Piscataquis, Franklin
36. Montana
2.2% seriously underwater, down from 2.4% last quarter and up from 1.8% last year
Counties: Lewis And Clark, Yellowstone, Silver Bow, Cascade
37. Alaska
2.1% seriously underwater, up from 2.0% last quarter and up from 2.1% last year
Counties: Matanuska-Susitna, Fairbanks North Star, Anchorage, Kenai Peninsula
38. Arizona
2.1% seriously underwater, down from 2.4% last quarter and up from 1.7% last year
Counties: Santa Cruz, Cochise, Pinal, Mohave
39. Oregon
2.1% seriously underwater, up from 2.0% last quarter and up from 1.8% last year
Counties: Malheur, Wasco, Coos, Clatsop
40. Washington
2.1% seriously underwater, up from 1.8% last quarter and up from 1.7% last year
Counties: Pacific, Chelan, Adams, Stevens
41. Hawaii
1.9% seriously underwater, up from 1.7% last quarter and up from 1.3% last year
Counties: Maui, Hawaii, Honolulu, Kauai
42. Nevada
1.9% seriously underwater, up from 1.9% last quarter and up from 1.5% last year
Counties: Nye, Elko, Lyon, Churchill
43. New York
1.8% seriously underwater, up from 1.7% last quarter and up from 1.7% last year
Counties: Saint Lawrence, Cattaraugus, Montgomery, Delaware
44. New Jersey
1.7% seriously underwater, up from 1.7% last quarter and up from 1.6% last year
Counties: Salem, Mercer, Cumberland, Hudson
45. California
1.7% seriously underwater, up from 1.6% last quarter and up from 1.3% last year
Counties: Trinity, Mariposa, Lake, Siskiyou
46. Massachusetts
1.3% seriously underwater, up from 1.2% last quarter and up from 1.2% last year
Counties: Suffolk, Berkshire, Hampden, Worcester
47. New Hampshire
1.2% seriously underwater, up from 1.1% last quarter and up from 1.0% last year
Counties: Coos, Grafton, Sullivan, Cheshire
48. Rhode Island
1.0% seriously underwater, up from 1.0% last quarter and up from 0.9% last year
Counties: Bristol, Providence, Kent, Newport
49. Vermont
0.65% seriously underwater, up from 0.6% last quarter and down from 0.7% last year
Counties: Chittenden, Washington, Addison
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