February 2017 - Making Millennials Move

TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link:

Contents of this Issue


Page 27 of 67

26 | TH E M R EP O RT FEATURE W hen the Qualified Residential Mortgage (QRM) regulation became effective for residential mortgage-backed securities in December 2015, many expected it would spur non-Qualified Mortgage (non- QM) originations and restart the securitization of non-QM loans. So far, this hasn't happened due to a variety of headwinds: low interest rates and low coupons, credit risk retention requirements, and a lack of clarity on how to comply with the eight factors of the ability-to-repay requirement (most notably, the perceived vague or conflicting requirements as to the sufficiency of income, income documentation, and assessing asset depletion for individuals that rely on investment income). Concerns about inconsistent regulatory enforcement or judicial interpretation have deterred potential investors, resulting in a lack of market liquidity for non-traditional mortgages, or non-traditional borrowers that do not fit into the standard QM or "QM patch" loans. Today, non-QM products continue to be on the fringe of the main-street marketplace, making credit access difficult for a significant number of potential borrowers. Fighting the Perception of Subprime C ontrary to popular belief, non- QM loans are not all higher risk loans, nor are they all of lower credit quality. In many cases, bor- rowers have high FICO scores and significant wealth (income and/or assets), but they may have non- traditional income sources or work circumstances that keep them from qualifying for a QM loan. Similarly, high income/net worth borrowers who are seeking a mort- gage as a vehicle to manage tax liability are often relegated to the non-QM category by their choice of interest-only or balloon-mortgages. When the 2015 TILA-RESPA Integrated Disclosure ("Know Before You Owe" or "TRID") regulation took effect, the Consumer Financial Protection Bureau (CFPB), provided guid- ance for fixed rate mortgages and standard adjustable rate mortgages. However, the Bureau failed to provide model forms and examples of how to comply with TRID as it relates to interest-only, pay-option ARMs, or balloon mortgages. Lenders who other - wise might offer such products have feared improperly manufac- turing a loan and subjecting them- selves to unnecessary regulatory scrutiny from whichever agency is charged with oversight. Likewise, investors remain leery of assignee liability for errors or oversights made by lenders during the underwriting process, because certain errors must be identified and corrected prior to closing or they become un-curable. Competing interpreta - tions of Appendix Q and what can and can't be cured has limited investors' willingness to accept The Non-QM Comeback Now that the hurdles previously stunting non-QM growth have begun to subside, could 2017 be the year they prosper? By John Levonick non-QM loans with even minor defects. While TRID also had cur- ability issues early on, investors have been able to get comfortable with TRID problems in certain circumstances. For the most part, this has not been the case with QM loans that lose designation due to Appendix Q questions and become non-QM. As result of these concerns, non-QM has become a bank product, because these institutions have balance sheets or portfolio capacity to hold them in the event there is a question of the veracity of the underwriter or the documentation relied upon. For non-banks that would have to sell non-QM loans as scratch-and- dent in the event of a defect, this type of lending is considered very risky, if not too risky. Non-QM Secondary Market Appetite F or private-label securitizers to begin securitizing non-QM loans, it is important for them to come to terms with new risk retention requirements that spon - sors retain at least 5 percent of the credit risk of the assets underlying the securities without transferring or hedging that credit risk during a specified period. The QRM regulation seeks to impose a strong incentive for the securitizing entity to ensure the underlying assets meet strict underwriting requirements and are thoroughly reviewed by an independent third-party review (TPR) or due diligence firm to validate the underwriting require - ments. Notably, the most relevant exemption from the credit risk retention requirements is one for residential mortgage-backed secu - rities collateralized by residential mortgages that meet the standard for QRM—a residential mortgage loan that is either a standard QM or a GSE eligible/agency insurable QM (colloquially referred to as a "QM patch"). A QRM loan, which must meet certain fee, debt-to-income (DTI), and minimum income/asset docu - mentation thresholds, cannot be: 1)

Articles in this issue

Archives of this issue

view archives of TheMReport - February 2017 - Making Millennials Move