More than eight months after the new regulations defining a “qualified mortgage” (QM) kicked in – and despite some recent flutters of interest in non-QM lending from Wall Street – local lenders say they still feel bound to stick to the new rules.
The QM saga begins, as so much in today’s mortgage industry, with the Dodd-Frank financial reform bill. One of the key ideas of the bill’s proponents was that bankers should have some “skin in the game,” e.g., that they should retain a portion of the risk associated with the loans they issued on their own portfolios.
But retaining risk would make loans more difficult to securitize and potentially impact banks’ profit and capital ratios, and bankers argued that if loans were conservatively underwritten, such protections were unnecessary. After years of back-and-forth between regulators and commentators, when the dust cleared in D.C., the Fed had come up with the concept of a “qualified mortgage,” which would be exempt from risk retention requirements. In addition, loans issued under government-sponsored entity underwriting guidelines would also be deemed “qualified mortgages.”
Last year, the Consumer Financial Protection Bureau (CFPB) agreed to use the Fed’s definition of a “qualified mortgage” as one of the guidelines it uses to determine whether a loan is affordable. Banks that issue loans that consumers can’t afford face steep legal penalties under CFPB rules.
The new CFPB rules kicked went into effect in January, and ever since banks have been diligently coloring inside the lines, with many opting to restrict their lending only to loans which can meet the more conservative QM guidelines.
Testing The Temperature
The QM rules, which generally require borrowers have moderate debt-to-income ratios, substantial down payments and extensive documentation of their credit history, have left some borrowers out in the cold, however. With the refinance market in drought and new home sales left to pick up the slack, some lenders have begun to stick a pinky toe in non-QM waters. Non-bank wholesale lenders, like California-based RPM Mortgage and Redwood Security Trust, have announced non-QM securitizations in recent weeks, and a recent Deutsche Bank white paper estimated the size of the potential non-QM market at $50 billion in volume.
“As a correspondent … we step outside [QM] if our bank partners, or our Wall Street partners, have an appetite for it. And we do a couple of Street firms that are giving us a product that will allow us to step outside those rules, which have some flexibilities built in,” said Brian Koss, executive vice president at Danvers-based Mortgage Network.
Community banks such as his will also engage in limited non-QM lending, said Jay Tuli, senior vice president at Arlington-based Leader Bank. But such loans are generally restricted to customers with whom the bank has longstanding relationships, whose financial situation and capacity (and propensity) to repay the bank knows well, even if they don’t fit neatly into the QM-box. In such a case, the bank is willing to retain the loan on its own portfolio, Tuli said.
“I imagine a lot of banks are in that boat. If a commercial customer we’ve known for 20 years comes in and he doesn’t exactly qualify [according to QM guidelines], we might make an exception,” he said.
Community banks who have a strong line as advisors to high-net-worth individuals will also often do some limited, strategic non-QM lending, Tuli said. If a client has “assets in our bank, we know the history, and so we’re going to engage in non-QM, even if we do face some additional regulatory risk or compliance risk. It’s an accommodation for another line of business,” he said.
‘You’ll Pay The Price’
But for community lenders, whose core business is residential lending, few can afford to dabble in non-QM waters for now. That’s largely because the non-QM secondary market products on offer are aimed pretty much exclusively at “the well-heeled borrower or investor,” said Koss. “If you have a large down payment, or considerable assets, we will come up with a product, but you’ll pay the price for it.”
Other borrowers who fall just outside the guidelines – first-time buyers with higher debt-to-income ratios, people with a recent blemish on their credit or small business owners or independent contractors who might not be able to document all their income – are still too risky for banks to be willing to take a chance on in the current environment. That means the despite the renewed interest in non-QM lending, few industry observers think it has the potential to drive much sales volume.
“There is a market. But there’s a lot [more] talk. It’s a very, very small portion of what’s being done,” said Koss, who estimated that non-QM lending makes up less than 5 percent of the current volume in the market.
Email: csullivan@thewarrengroup.com
