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 originations.
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 mid-sized lenders.
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 loans.
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.