QM Has Succeeded... in Raising Costs, not in Changing Business Strategies
Less than a half-year after the
Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules took effect most
lenders report little impact on their business strategies but they do
anticipate an increase in their operational costs. The new rules were mandated by the Dodd-Frank
Wall Street Reform and Consumer Protection Act and put into place by the
Consumer Financial Protection Bureau.
The ATR generally requires lenders to consider and verify factors that
indicate consumers will be able to repay the loan. Mortgage loans with limited points and fees
and restrictive loan features such as no negative amortization are considered to meet the
definition of a QM and presumed to comply with the new rule.
At the same time many secondary
market investors have strengthened their requirements for post-funding quality
control reviews by lenders to insure compliance with investor guidelines. These investors include the government sponsored
enterprises Fannie Mae and Freddie Mac.
Because both the new rules and
the increased quality control standards have generated a lot of discussion
Fannie Mae's Economic and Strategic Research group conducted a survey in June
of senior mortgage executives to find out how lenders are adapting to
them. It was conducted as part of Fannie
Mae's Mortgage Lender Sentiment Survey, a quarterly online polling of Fannie
Mae lenders' senior executives. The
objectives of the survey were to determine:
To what extent lenders anticipate the new QM
rules will impact their business practices across business strategies, credit
standards, market share, and operational costs and:
Lenders' views about their investments in QC
reviews and how much QC related costs have changed over the past year.
There were 186 respondents to
the survey including mortgage banks, traditional banks, and credit unions. Forty-seven were considered large
institutions, 47 medium sized, and 89 small(er) based on the number of loan
Eighty percent of the lenders said
they do not plan to pursue non-QM loans or are going to wait and see or conduct
business as usual. Larger lenders are
more likely than their smaller counterparts to indicate they do plan to pursue
non-QM loans although a larger dollar volume of non-QM loans is anticipated by
Thirty-nine to 40 percent of
respondents, regardless of the size of their institution anticipate that they
will do no non-QM lending at all and 84 percent say that they expect 90 percent
or more of their single-family mortgage origination by dollar volume to be QM
Slightly more than a third of
all respondents expect their credit standards will tighten in response to the QM
rules with mid-sized firms responding most often in the affirmative. Few institutions (6 percent) expect standards
to loosen. Lenders were fairly evenly
divided about the impact of the rules on their originations with about a third expecting
they will increase, decrease, and stay about the same. About half of large lenders think their own
share of the market will increase. Seventy-four
percent of all respondents say they expect operational costs to increase
because of the rules.
Respondents were also asked questions
about the impact of the new QC standards.
First they were asked how their firm's costs for quality control related
activities had changed over the previous 12 months. Eighty-five percent said these costs had
increased but while 91 percent of both large and mid-sized firms made this
assertion, only 75 percent of smaller firms claimed higher costs.
Asked about the trade-off 74
percent said that the investment in QC was likely to reduce repurchase
risks. Again there was significant
variation by size with 84 percent of larger institutions agreeing with that statement
and 76 percent of mid-sized lenders.
However only 64 percent of smaller lenders thought they would see
reduced repurchase risk.