Lenders Can Actually Benefit from Non-QM Lending -CoreLogic

In the second in a series of whiternpapers exploring the “Foundation for a Sound Housing Market” CoreLogic looks atrnthe Ability-to-Repay (ATR) and Qualified Mortgage (QM) standards that are duernto go into effect on January 10.  Inrnaddition to outlining and analyzing the two new rules put in place by thernConsumer Financial Protection Bureau (CFPB) under the Dodd-Frank Wall StreetrnReform and Consumer Protection Act, the authors, Margarita S. Brose and FaithrnA. Schwartz, look at how lenders and servicers can actually benefit from thernnew rules.</p

CoreLogic views the two rules asrncarrying out two of President Obama’s core principals to reform the nation’srnhousing finance system and the vision articulated by Elizabeth Warren in herrn2007 article “Unsafe at any Rate.”  ThernPresident, in August of this year said that putting private capital at therncenter of the housing finance system was his first core principal while anotherrnwas to support affordability and access to homeownership for creditworthyrnfirst-time home buyers.  Warren for herrnpart proposed a regulated marketplace where the consumer of any type of consumerrnfinancial product would get the same protections as the purchaser of arntoaster.  </p

The paper reviews the events andrnexcesses in lending that led to the financial crisis exemplified by lenders whornwere “willing to underwrite and sell limited documentation loans coupled withrnadditional risk layering, which included higher loan-to-value lending, cash-outrnrefinancing and teaser ARMs.”  The failurernto review the borrowers’ ability to repay at the time of origination had seriousrnconsequences not only for the borrower but for originators, servicers, and therninvestment communities.  “The impact ofrnthe crisis on the economy can be measured in part by unemployment which peakedrnat 10.1 percent in 2010.”</p

As the country heals from the recessionrnand the housing system recovers “there are a number of opportunities to ensurernthe creation of a sound lending process that works for all parties.”  The roadmap to this sound marketplace,rnCoreLogic says, “Will rest on transparency, accountability, and traceability.”  Validation of consumer data and documentation,rnincluding material changes prior to funding a mortgage loan will lead to more confidencernin the process.  Consumers, originators,rnservicers and investors will benefit from the certainty and clarity the new QMrnand ATR rules will bring to the market, Bros and Schwartz say, as “we make ourrnway toward attracting private capital and shrinking the government footprint inrnhousing.” </p

The QM and ATR rules attempt to putrnsafeguards in place to prevent the making of complex, costly mortgages tornborrowers who may not fully understand their obligations and lenders,rnservicers, and investors have been working to understand the impact of thernrules.  CoreLogic credits CFPB with beingrninclusive in its rulemaking but one concern is how to implement the rules. </p

Because the law still leaves some riskrnof litigation for lenders who work outside of the QM scope there is concernrnthat the market can still meaningfully serve homeowners who may fall outside ofrnthose guidelines.  Another worry is the uncertaintyrnof investors’ risk appetite for non-QM loans which may drive up pricing.  By not including a down payment threshold inrnthe QM rule CFPB preserved the opportunity for higher LTV loans to remain QMsrnwhen possible but there is still the question of how to meet the demand ofrnfirst time homebuyers with low wealth but less risky credit profits who mayrnhave limited options within government homebuyer programs.  There is also concern that the rules willrnlimit or eliminate non-qualified products.</p

The authors see the ATR and QM rules asrnoffering many possibilities to encourage private capital flows into housing financernbecause sound lending is good business. rnThe rules will require lenders to review their existing processes andrnprocedures, data validation, and counterparty tracking and surveillance.  Traceable documentation will need to bernmaintained and CFPB will review it during examinations.  Companies not familiar with regulatoryrnreviews are the most apprehensive about the rule implementation, but a measuredrnapproach should address any anxiety about audits.</p

Lenders need to default to common sensernwhen thinking about compliance; how best to adjust processes to validate howrninformation was verified during underwriting and how to establish a clear auditrntrail.  “When these issues are solved,rnthe market will have confidence that the information and processes establishedrnto make a sound loan are likely to result in sound loan performance for thernlife of the loan.”</p

In conclusion the authors ask what thernnon-QM market will look like.  Some, theyrnsay, believe there will be no market and it is fairly certain that thernpre-crisis style of lending will not return. rnLoans with no-to-low documentation will be few and far between and loansrnwith DTI levels above the 43 threshold for QM loans will be hard to find.  The Mortgage Bankers Association estimatesrnthat originations in 2014 will be one-third of the market “in the days ‘whenrnall loans made sense.'” </p

Schwartz and Brose say there are “manyrnin the hedge fund world (who) will tell you that there is a nearly unlimited market</bfor those who do not need the ordinary protections afforded the unsophisticatedrnbuyer."  In the new ATR and QM world,rnlenders will still be able to offer loans to home purchasers who are investors andrnevidence an ability to repay but one outside the explicit requirements of the newrnrules.  "While the QM rule provides regulatoryrnsafeguards for ordinary home buyers, it does not prevent a lender from making arnnon-QM loan."  It does, however requirernthat the lender make a sound risk assessment and have the documentation tornsupport that assessment.  "Accuraternunderlying mortgage data, servicer due diligence, and enforceable andrnconsistent representations and warranties will be required for any entity engagingrnin non-QM lending, but the tools and data are available to make that a reality."