Is the “fully indexed rate” that is referred to in the Underwriting Factors for the Ability-to-Repay standards the same as the “fully indexed rate” used to calculate a high cost mortgage? Our portfolio loans are written as ARM’s which have a margin tied to an index. We are confused by what is meant by “fully indexed rate” and are not sure what is the proper way to calculate it. Our ARM loans do not have an introductory/promotional rate (teaser), we have an initial rate which is set for the first 5 or 7 years.

The underwriting standards for ATR: “The consumer’s monthly payment on the covered transaction. This is calculated by assuming the loan will be repaid in substantially equal monthly payments during its term. If the loan is an ARM loan, the monthly payment must be calculated using the fully-indexed rate (meaning the rate when the loan is "recast" or reset to the non-promotional rate or the introductory rate, whichever is higher.”

For High Cost Mortgage: “For transactions where the interest rate varies with an index, use the greater of the introductory interest rate (if any) or the fully-indexed rate (i.e., the interest rate that results from adding the maximum margin permitted at any time during the term of the transaction to the value of the index rate in effect on the date you set the interest rate for the transaction).”

Our ARM loans do not have an introductory/promotional rate (teaser), we have an initial rate which is set for the first 5 or 7 years.

Unless that rate equals the current index plus margin, how is this not an introductory rate??

The initial fixed rate is greater than the index plus margin. When thinking of an introductory or promotional rate, which usually are teaser rates, it's hard to think of the intial fixed rate as an introductory rate, but I understand what you're saying.

Additionally, when determining what rate to use when qualifing a borrower for ATR and High Cost Mortgages, it is hard to think of the fully indexed rate or the introductory rate (whichever is greater) as the rate to use for qualifing purposes. Our ARM's have caps (2-2-6) and it's rates based on those caps that are disclosed on the TIL, which would be worst case scenarios. So, do we use whichever is greater of the fully indexed/introductory rate or the worst case scenario rates based on the caps.

The definition of "fully indexed rate" under the ATR rule is the interest rate calculated using the index or formula that will apply after recast, as determined at the time of consummation, and the maximum margin that can apply at any time during the loan term.

We use 11th DCOF as our index and 2.75% as our margin. As of today the 11th DCOF is .956 add 2.75% your rate at recast would be 3.706%. However, your intitial rate is 5%. The initial rate is greater than the "fully indexed rate", use the initial rate to determine ATR.

Thank you, this information is very helpful!

Just for kicks and giggles for those unfamiliar with the premium initial rate scenario, what's the usual reason for using the higher rate until the first rate change date?

What if you have a ceiling, e.g., 10%? Our rate is Prime + 1, adjusting monthly, with a maximum rate of 10%. I assume we should qualify them at 10%? What if the payment amount doesn't change, only the final balloon payment amount?

We have a similar scenario. Index is prime plus 1% margin.
State law maximum for home loans is 18%.
The initial rate is the fully indexed rate (no discount, no premium.
What rate do we use to qualify the customer?

Some say 18%, some say 4.25%, the fully indexed rate.

The fully indexed rate is the current index plus margin and has nothing to do with the interest rate cap..

But if you are trying to do QMs, then you will need to consider the maximum rate in the first five years, which may or may not be the fully indexed rate.

So Wanted, if your rate will change within the first five years and there is no rate cap, then you will need to use the 18% to have a standard QM. See the commentary to 43(e)(2)(iv). If you just want standard ATR, then you will use the 4.25%

I think I am missing something on the fully indexed rate. Where is the floor taken into account?

I am thinking of the following scenario:
floor rate 7%
intro rate 2%
variable rate of .5+ WSJ

Is the floor somehow supposed to be included in the definition of margin?

Based on the definition of Fully indexed rate that I see, the fully indexed rate in this example would only be the greater of .5 + WSJ or 2%. No where is the 7% floor going to be considered. Seems like I am missing something.

The current fully indexed rate considering the floor that you quoted is 7%.