QM and Non-QM Are Going to Get Along Just Fine

Savvy entrepreneurs or established organizationsrnhave little to fear from the new qualified mortgage (QM) and Ability-to-Repayrn(ATR) regulations about to come into effect a new white paper from CoreLogicrnsays. They will find a way to deliver qualified and non-qualified mortgages inrna way that meets all the regulations, incorporates sound lending and consumerrnprotections, and makes a profit.</p

The paper, ATR/QMrnStandards:  Foundation for a SoundrnHousing Market, written by Faith A. Schwartz, CoreLogic’s manager ofrngovernment business and former director of HOPE NOW and Margarita S. Brose, arnformer director in Barclay Bank’s Operational Risk Management Group, is upbeatrnabout the mortgage market, its regulatory environment, and the opportunities itrnpresents.</p

They point to the current environment as resulting fromrnPresident Obama’s goals for a new housing finance system; that private capital willrnbe at its center, but it must maintain affordability and access tornhomeownership.  The Dodd-Frank Act (DFA)rnrequired lenders to assess the borrower’s ability to repay a mortgage loan andrnthe Consumer Financial Protection Bureau’s (CFPB) regulations have formulated thernrules to guide this.  </p

CFPB’s QM and ATR provide the eight factors a lenderrnmust evaluate; current income or assets, current employment, monthly payment onrnthe subject loan, payments on other loans secured by the property, payments forrntaxes and insurance, current debt obligations, debt-to-income ratio, and creditrnhistory.   The rules also providernthresholds for QM which, when met and depending on the APR create a “safernharbor” or presumption of compliance.  Thesernprotections, the authors say, fulfill the vision of Elizabeth Warren in herrn2007 article Unsafe at Any Rate inrnwhich she proposed a regulated marketplace where the consumer would get thernsame protections as the purchaser of a toaster. rn</p

Access to homeownership became increasingly commonrnbefore the financial crisis, in part because the mortgage industry was willingrnto underwrite and sell loans with limited documentation coupled with additionalrnrisk layering.  This led to a “breathtaking”rn$3 trillion annual market for purchase and refinance mortgages in thernpre-crisis period.</p

As the market continues to heal from the aftereffectsrnof these loans there are, the authors say, a number of opportunities to ensurernthe creation of a sound lending process that works for all parties.  Achieving this will require transparency,rnaccountability, and traceability.</p

In addition to presuming compliance with ATR a QMrnloan must meet limits on points and fees and specific underwritingrnrequirements.   Loans are automatically considered QM (even ifrnthey do not require verification of income or meet points and fees or specificrnunderwriting requirements) if they are eligible for guarantee or purchase byrnFreddie Mac or Fannie Mae a laundry list of government agencies.  </p

If some of the thresholds are not met there is stillrna presumption for a QM loan that ATR provisions have been met but a consumerrncan rebut this by providing evidence about his inability to repay the loan.  He can specify the features that disqualify arnloan from this designation including negative amortization, interest only,rnballoon payment features, and amortization exceeding 30 years.  </p

Lenders who lend beyond the QM scope do have somernlitigation risk.  While this is arnconcern, it is hoped that the market an still serve homeowners who fall outsidernof the QM rules because of high DIT ratios, high points and fees and/orrninterest rates  and other QM criteria.  </p

Another concern is how much appetite investors willrnhave for non-QM loans.  By not includingrna downpayment threshold CFPB preserved the opportunity for higher LTV loans tornremain QMs when possible.  One area ofrnfocus is how to meet the demand of the changing demographics of first timernhomebuyers, some with low wealth but less risky credits scores, who may havernlimited options among first time programs offered by the government.  There is also a concern that lenders mayrnlimit or eliminate non-qualified products. </p

The authors see many opportunities under the ATR andrnQM rules for private capital to flow into the housing finance system.  It does not make sense to write a mortgagernwhich the borrower cannot repay and the rules will require lenders to reviewrntheir existing processes and procedures, data validation, and counterpartyrntracking and surveillance.  Traceablerndocumentation of the eight ATR factors and the QM fee minimums will need to bernretained.  CFPB has issued a list of thernrequired documentation and will review it during their examinations.  Companies who are not used to reviews arernapprehensive but a measured approach to implementing new processes and proceduresrnshould address any anxiety about audits.</p

Much of the concern defaults to common sense whenrnthinking about systems and compliance. rnHow does a lender validate the way information was verified duringrnunderwriting?  How does an investorrnestablish a clear audit trail?  Whenrnthese issues are resolved markets will have confidence that the information andrnprocesses established to make a sound loan are likely to result in sound loanrnperformance over the life of the loan.</p

The authors say that it is almost a certainty thatrnpre-crisis lending will not return and that there will be few if any no-docrnloans and loans with DTI above the QM thresholds will not be easy to get.  The Mortgage Bankers Association estimatesrnapproximately $1 trillion in mortgages will be originated in 2014, one third ofrnthe pre-crisis level.   Still, the newrnmarket has many opportunities.</p

“Many in the hedge fund world will tell you thatrnthere is an unlimited market for those who do not need the ordinary protectionsrnafforded the unsophisticated buyer,” the Schwartz and Brose say.  In the new ATR and QM world lenders willrnstill be able to offer mortgages to housing investors using ordinaryrncontractual conditions.  Lenders willrnmarket mortgages for multi-family dwellings and commercial properties tornpurchasers who evidence an ability to pay but outside of the CFPB guidelines.</p

While the QM rule provides regulatory safeguard forrnordinary home buyers, it does not prevent a lender from making a non-QM loan, assumingrnit adheres to the broader ability to pay requirements.  But it does require those lenders to make arnsound risk assessment and have the documentation to support it.  

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