Lenders Can Actually Benefit from Non-QM Lending -CoreLogic


In the second in a series of white
papers exploring the “Foundation for a Sound Housing Market” CoreLogic looks at
the Ability-to-Repay (ATR) and Qualified Mortgage (QM) standards that are due
to go into effect on January 10.  In
addition to outlining and analyzing the two new rules put in place by the
Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Wall Street
Reform and Consumer Protection Act, the authors, Margarita S. Brose and Faith
A. Schwartz, look at how lenders and servicers can actually benefit from the
new rules.

CoreLogic views the two rules as
carrying out two of President Obama’s core principals to reform the nation’s
housing finance system and the vision articulated by Elizabeth Warren in her
2007 article “Unsafe at any Rate.”  The
President, in August of this year said that putting private capital at the
center of the housing finance system was his first core principal while another
was to support affordability and access to homeownership for creditworthy
first-time home buyers.  Warren for her
part proposed a regulated marketplace where the consumer of any type of consumer
financial product would get the same protections as the purchaser of a

The paper reviews the events and
excesses in lending that led to the financial crisis exemplified by lenders who
were “willing to underwrite and sell limited documentation loans coupled with
additional risk layering, which included higher loan-to-value lending, cash-out
refinancing and teaser ARMs.”  The failure
to review the borrowers’ ability to repay at the time of origination had serious
consequences not only for the borrower but for originators, servicers, and the
investment communities.  “The impact of
the crisis on the economy can be measured in part by unemployment which peaked
at 10.1 percent in 2010.”

As the country heals from the recession
and the housing system recovers “there are a number of opportunities to ensure
the creation of a sound lending process that works for all parties.”  The roadmap to this sound marketplace,
CoreLogic says, “Will rest on transparency, accountability, and traceability.”  Validation of consumer data and documentation,
including material changes prior to funding a mortgage loan will lead to more confidence
in the process.  Consumers, originators,
servicers and investors will benefit from the certainty and clarity the new QM
and ATR rules will bring to the market, Bros and Schwartz say, as “we make our
way toward attracting private capital and shrinking the government footprint in

The QM and ATR rules attempt to put
safeguards in place to prevent the making of complex, costly mortgages to
borrowers who may not fully understand their obligations and lenders,
servicers, and investors have been working to understand the impact of the
rules.  CoreLogic credits CFPB with being
inclusive in its rulemaking but one concern is how to implement the rules.

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

The authors see the ATR and QM rules as
offering many possibilities to encourage private capital flows into housing finance
because sound lending is good business. 
The rules will require lenders to review their existing processes and
procedures, data validation, and counterparty tracking and surveillance.  Traceable documentation will need to be
maintained and CFPB will review it during examinations.  Companies not familiar with regulatory
reviews are the most apprehensive about the rule implementation, but a measured
approach should address any anxiety about audits.

Lenders need to default to common sense
when thinking about compliance; how best to adjust processes to validate how
information was verified during underwriting and how to establish a clear audit
trail.  “When these issues are solved,
the market will have confidence that the information and processes established
to make a sound loan are likely to result in sound loan performance for the
life of the loan.”

In conclusion the authors ask what the
non-QM market will look like.  Some, they
say, believe there will be no market and it is fairly certain that the
pre-crisis style of lending will not return. 
Loans with no-to-low documentation will be few and far between and loans
with DTI levels above the 43 threshold for QM loans will be hard to find.  The Mortgage Bankers Association estimates
that originations in 2014 will be one-third of the market “in the days ‘when
all loans made sense.'”

Schwartz and Brose say there are “many
in the hedge fund world (who) will tell you that there is a nearly unlimited market
for those who do not need the ordinary protections afforded the unsophisticated
buyer.”  In the new ATR and QM world,
lenders will still be able to offer loans to home purchasers who are investors and
evidence an ability to repay but one outside the explicit requirements of the new
rules.  “While the QM rule provides regulatory
safeguards for ordinary home buyers, it does not prevent a lender from making a
non-QM loan.”  It does, however require
that the lender make a sound risk assessment and have the documentation to
support that assessment.  “Accurate
underlying mortgage data, servicer due diligence, and enforceable and
consistent representations and warranties will be required for any entity engaging
in non-QM lending, but the tools and data are available to make that a reality.”

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