It was just over three weeks ago that mortgage bankers flipped open their calendars to see the day had finally arrived, and QM was the law of the land.
It might be understandable if the arrival of that red-letter date brought about more than a few winces and shivers, because many industry observers have long predicted that the new federal regulations which define the terms of a “qualified mortgage” (QM) will end up excluding many borrowers who would otherwise be considered good credit risks.
Recently, however, some lenders are evincing a surprising willingness to dip their toes into non-QM waters.
Earlier this month, Wells Fargo announced that it was planning to assign 400 underwriters to a newly created portfolio-lending division, much of which would be dedicated to non-QM loans. Bank of America and JPMorgan Chase have also said they plan to originate at least some non-QM loans, including interest-only loans to high net worth borrowers.
Large lenders’ willingness to go after non-QM loans may come as a surprise to many. The industry’s voice in Washington, the Mortgage Bankers Association (MBA), has warned the Consumer Financial Protection Bureau (CFPB), which enforces the QM rules, that the changes would cause lenders to pull back.
Pete Mills, senior vice president of the MBA, told a gathering of bankers at the New England Mortgage Expo earlier this month, “We’ve had conversations with the Bureau [Director Richard Cordray] wants people to lend within the full extent of the QM boundaries, and we told him it’s not going to happen. Until people understand what the litigation risk is, what the cost of a mistake is, we think people are going to be pretty conservative, and stay well inside, if not the QM safe harbor, at least inside the QM bounds.”
But non-QM lending might simply be too big a chunk of the market to ignore. According to a study cited by Mills himself, up to 20 percent of current mortgages might not meet QM standards, either because their fees were too high or borrower’s debt to income ratios were above the 43 percent QM threshold. The study examined a pool of loans issued last September, when newly tightened credit standards and reporting requirements were already in place.
That’s a big enough chunk of the market to entice some big players. One senior executive at a national mortgage lender told Banker & Tradesman his firm had recently been approached by a major Wall Street bank looking to do non-QM loans – at considerable mark-up on interest rates. Hedge funds, too, are interested in the market, with some looking to securitize non-QM jumbo mortgages – though with several caveats in place as to the borrower’s required credit score and income.
Challenge For Smaller Lenders
It’s not yet clear how many borrowers who fall outside the government’s guidelines will be able to squeeze themselves into the cautious overlays required by secondary market investors. But the large banks’ embrace of non-QM lending could present a challenge for smaller, community lenders, who often sell their loans on to bigger banks or investors for securitization.
If non-QM loans establish themselves as a big chunk of the market, it will be difficult for smaller lenders to ignore the segment. Yet selling the loans on to a larger lender may not enable them to escape the risks associated with non-QM lending. In an effort to tamp down on some of the lending practices that drove the housing boom, the new rules allow borrowers to sue a lender if they contend that the lender should have known they wouldn’t be able to afford the loan. Even if a loan is underwritten to conform with investors’ requirements, any legal liability still rests with the originator.
“If a borrower challenges that at a later date, it goes right back to the originator of the loan when it was closed. If ABC Mortgage does a loan and Wells Fargo underwrites and approves it, and Wells sends it on to Fannie Mae, and then down the road, the borrower challenges it, Fannie Mae gives it to Wells, Wells will kick it right back to the originator. I’ve confirmed that [with the regulators],” said Jerami Marshal, immediate past chair of the Massachusetts Mortgage Bankers Association.
That’s a much tougher hit to swallow for a small community bank than for the Wells Fargos of the world.
Email: csullivan@thewarrengroup.com
