TheMReport — News and strategies for the evolving mortgage marketplace.
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40 | Th e M Rep o RT O r i g i nat i O n S e r v i c i n g a na ly t i c S S e c O n da r y m a r k e t SERVICING the latest atr, Qm aren't majorly impacting Prime mortgage market The 'safe harbor' offered for conforming loans is keeping mortgage vehicles from being battered. T he ability-to-repay and qualified mortgage (QM) rules that went into effect earlier this year are not having a significant impact on approvals of prime conforming residential mortgage loans, but they are impacting the jumbo and nontraditional loan markets, according to the July 2014 Senior Loan officer opinion Survey on Bank Lending practices conducted by the Federal Reserve. Meanwhile, the Fed reports, credit standards continue to ease at major lending institutions. Most large banks reported that because of the 'safe harbor' for loans that meet GSe standards, the ability- to-repay/QM guidelines are not having a major impact on their approval rates for prime, conforming loans. however, "a more substantial share of other respondents" reported their approval ratings are lower due to the new industry rules. While 77.8 percent of large bank respondents said their approval ratings for prime residential mortgages is "about the same" as it would be without the new rules, 47.1 percent of other banks said the same is true at their institutions. In particular, jumbo loans and nontraditional are being impacted by the new rules, according to the Fed's survey results. More than half of survey respondents said these two types of loans are at least "somewhat lower" than they would be without the new rules. The two pieces of the ability-to- repay and QM rules that are most impacting approval rates, according to the Fed, are the mandatory assessment of credit history, assets, and debt payments; and the debt-to- income ratio cap of 43 percent. overall, banks reported easing credit standards for residential home loans. however, standards for nontraditional loans and home equity lines of credit (heLoCs) remained about the same. Many banks also reported that despite easing credit standards, their standards remain stricter than their institution's long-term average. Demand for residential loans increased for the first time in one year, and demand for heLoCs increased for the first time since october 2013, according to the Fed's survey. Credit standards for commercial real estate loans is also easing at most banks and are now below their long-term average standards at some institutions, according to the Fed. "The financial shock associated with a heLoC payment increasing to cover both principal and interest can cause liquidity issues for some borrowers. This dynamic is driving significant concern in the lending marketplace." — Steve Chaouki, TransUnion as draw Periods close, HelOcs Present elevated threat Increasing bills over the next three years threaten to cause defaults. n ow that so many of the once-popular home equity lines of credit (HELOCs) are coming due, many borrowers could be in for what TransUnion calls "payment shock." A new study by the credit re- porting agency shows that nearly half of all HELOC balances at the end of 2013—totaling about $474 billion—were originated between 2005 and 2007. Many of these HELOCs had 10-year draw periods, which means that the bill will come for those borrow- ers over the next few years. The problem, however, is not the tab itself, but the shock bor- rowers may get when they see how much their bills are now that they've reached their end- of-draw periods (when no more money can be borrowed from the line) and how quickly the interest adds up to higher payments. "The financial shock associated with a HELOC payment increas- ing to cover both principal and interest can cause liquidity issues for some borrowers," said Steve Chaouki, head of financial servic- es at TransUnion. "This dynamic is driving significant concern in the lending marketplace." According to TransUnion, as much as $79 billion of those out- standing HELOC balances could be at elevated risk of default in the next few years. "[A]n understanding of con- sumer cash flows is at the heart of determining if someone can manage a larger HELOC payment each month, and how much larger that payment can grow before the consumer runs into liquid- ity constraints," said Ezra Becker, co-author of the study and vice president of research and consult- ing for TransUnion. According to the study, con- sumers with sufficient equity in their homes could avoid HELOC default, given that they would have greater options—refinance the line of credit or sell the home. Key for borrowers is to un- derstand the interaction between home equity, their options, and their cash flow. For example, a consumer might have a high credit score but lack the ability to absorb payment shock. Such a consumer may demonstrate a higher risk of HELOC default after end-of-draw than a con- sumer with an equivalent high credit score but with ample cash flow to withstand a new payment structure. Lower debt all around, of course, will also help borrowers mitigate some of the payment shock, Becker said. But that's not very likely right now. "The vast majority of the nearly 16 million consumers with a HELOC carry other forms of debt as well," he said.