At the beginning of 2014 rules went into effect that differentiated between qualified mortgages (QM) and non-qualified mortgages (non-QM)!
The purpose of making the distinction between the two was the governments methodology to try and avoid the scourge of the bad loans that helped lead to the 2008 financial crisis.
This ‘toxic debt’ that was originated prior to 2008 using what came to be seen as extremely lax underwriting standards, went into default post-crisis when real estate values cratered and the economy went into the tank.
Central to the problem was the fact that instead of banks putting loans they made into their own portfolio, thereby facing the financial risk of them going into default, a high percentage of a lenders originated loans that were packaged and sold to someone else.
Common sense might say (although not great business or ethical practice) that if you are unloading all of the risk that you might cut corners to get a loan funded.
Welcome to QM!
As a way to workaround a lenders possible temptation to make a questionable mortgage loan, the CFPB developed qualified vs non-qualified mortgages.
‘A qualified mortgage is one that meets the Consumer Financial Protection Bureau’s specific underwriting, fee and documentation requirements or (for now) meets the underwriting requirements of Fannie Mae and Freddie Mac and does not contain what are deemed to be risky product features.‘ (Source)
‘The (QM) rule is a crucial provision of the Dodd-Frank Act that requires lenders to verify a borrower’s income based on eight underwriting factors. Lenders originating so-called “non-QM” loans face stiff penalties if they fail to properly verify borrowers’ wherewithal to meet their obligations.
Non-QM loans carry no legal protections for lenders, but they offer fatter profit margins since lenders can charge more for them.‘ (Source)
Under the phrase ‘no legal protections for lenders’ is the reality that under certain circumstances the lender might be compelled to buyback a loan that they had made which went bad!
Due to this feature, most market participants were left with the impression that a non-QM loan would be extremely hard for a borrower to find.
For mortgage lenders the concern was that they would lose access to a large (and profitable) segment of the mortgage market.
For borrowers who might not fit into the QM box the fear was that they would not have the ability to finance a home purchase.
The reality to date has fallen somewhere in the middle and, while interest in originating these loans may be tepid so far (19% of 186 lenders surveyed)), many other lenders have expressed interest in possibly becoming active at a later date (46%).
The bottom-line through the first 9 months of the year?
‘The survey shows an evolving understanding of the risks and returns of this segment. The mortgage world is separating into two camps. In the first are banks that can fund non-QM loans and see the risk of not offering such loans to creditworthy customers as greater than the risk that the loans will go bad and expose the bank to losses. In the second group are mortgage bankers who are less likely to be involved in this type of loans because they are bound by the lack of availability of non-QM outlets in the secondary market.‘
We will keep an eye on this developing story!
Written by Michael Haltman, President of Hallmark Abstract Service, New York.
HAS is a provider of title insurance in New York State for residential and commercial real estate transactions specializing in the areas of New York City, Long Island and Westchester.
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If you have any questions you can reach Michael by email at email@example.com.Google+