Savvy entrepreneurs or established organizations
have little to fear from the new qualified mortgage (QM) and Ability-to-Repay
(ATR) regulations about to come into effect a new white paper from CoreLogic
says. They will find a way to deliver qualified and non-qualified mortgages in
a way that meets all the regulations, incorporates sound lending and consumer
protections, and makes a profit.
The paper, ATR/QM
Standards: Foundation for a Sound
Housing Market, written by Faith A. Schwartz, CoreLogic's manager of
government business and former director of HOPE NOW and Margarita S. Brose, a
former director in Barclay Bank's Operational Risk Management Group, is upbeat
about the mortgage market, its regulatory environment, and the opportunities it
They point to the current environment as resulting from
President Obama's goals for a new housing finance system; that private capital will
be at its center, but it must maintain affordability and access to
homeownership. The Dodd-Frank Act (DFA)
required lenders to assess the borrower's ability to repay a mortgage loan and
the Consumer Financial Protection Bureau's (CFPB) regulations have formulated the
rules to guide this.
CFPB's QM and ATR provide the eight factors a lender
must evaluate; current income or assets, current employment, monthly payment on
the subject loan, payments on other loans secured by the property, payments for
taxes and insurance, current debt obligations, debt-to-income ratio, and credit
history. The rules also provide
thresholds for QM which, when met and depending on the APR create a "safe
harbor" or presumption of compliance. These
protections, the authors say, fulfill the vision of Elizabeth Warren in her
2007 article Unsafe at Any Rate in
which she proposed a regulated marketplace where the consumer would get the
same protections as the purchaser of a toaster.
Access to homeownership became increasingly common
before the financial crisis, in part because the mortgage industry was willing
to underwrite and sell loans with limited documentation coupled with additional
risk layering. This led to a "breathtaking"
$3 trillion annual market for purchase and refinance mortgages in the
As the market continues to heal from the aftereffects
of these loans there are, the authors say, a number of opportunities to ensure
the creation of a sound lending process that works for all parties. Achieving this will require transparency,
accountability, and traceability.
In addition to presuming compliance with ATR a QM
loan must meet limits on points and fees and specific underwriting
requirements. Loans are automatically considered QM (even if
they do not require verification of income or meet other
underwriting requirements) as long as they are eligible for guarantee or purchase by one of the agencies (Fannie, Freddie, FHA, VA), meet point/fee requirements, and requirements regarding "risky features."
If some of the thresholds are not met there is still
a presumption for a QM loan that ATR provisions have been met but a consumer
can rebut this by providing evidence about his inability to repay the loan. He can specify the "risky features" that disqualify a
loan from this designation including negative amortization, interest only,
balloon payment features, and amortization exceeding 30 years.
Lenders who lend beyond the QM scope do have some
litigation risk. While this is a
concern, it is hoped that the market an still serve homeowners who fall outside
of the QM rules because of high DIT ratios, high points and fees and/or
interest rates and other QM criteria.
Another concern is how much appetite investors will
have for non-QM loans. By not including
a downpayment threshold CFPB preserved the opportunity for higher LTV loans to
remain QMs when possible. One area of
focus is how to meet the demand of the changing demographics of first time
homebuyers, some with low wealth but less risky credits scores, who may have
limited options among first time programs offered by the government. There is also a concern that lenders may
limit or eliminate non-qualified products.
The authors see many opportunities under the ATR and
QM rules for private capital to flow into the housing finance system. It does not make sense to write a mortgage
which the borrower cannot repay and the rules will require lenders to review
their existing processes and procedures, data validation, and counterparty
tracking and surveillance. Traceable
documentation of the eight ATR factors and the QM fee minimums will need to be
retained. CFPB has issued a list of the
required documentation and will review it during their examinations. Companies who are not used to reviews are
apprehensive but a measured approach to implementing new processes and procedures
should address any anxiety about audits.
Much of the concern defaults to common sense when
thinking about systems and compliance.
How does a lender validate the way information was verified during
underwriting? How does an investor
establish a clear audit trail? When
these issues are resolved markets will have confidence that the information and
processes established to make a sound loan are likely to result in sound loan
performance over the life of the loan.
The authors say that it is almost a certainty that
pre-crisis lending will not return and that there will be few if any no-doc
loans and loans with DTI above the QM thresholds will not be easy to get. The Mortgage Bankers Association estimates
approximately $1 trillion in mortgages will be originated in 2014, one third of
the pre-crisis level. Still, the new
market has many opportunities.
"Many in the hedge fund world will tell you that
there is an unlimited market for those who do not need the ordinary protections
afforded the unsophisticated buyer," the Schwartz and Brose say. In the new ATR and QM world lenders will
still be able to offer mortgages to housing investors using ordinary
contractual conditions. Lenders will
market mortgages for multi-family dwellings and commercial properties to
purchasers who evidence an ability to pay but outside of the CFPB guidelines.
While the QM rule provides regulatory safeguard for
ordinary home buyers, it does not prevent a lender from making a non-QM loan, assuming
it adheres to the broader ability to pay requirements. But it does require those lenders to make a
sound risk assessment and have the documentation to support it.