Today is the day for ATR/QM and every lender’s head has been swimming with acronyms, ratios and percentages to get their people ready. To simplify matters (if that’s possible), the primary issues at hand are broken into three distinct categories:
- Non-QM Loans
- QM Safe Harbor Loans
- QM Rebuttable Presumption Loans
In short, each company must assess and react to their belief that they have the compliance, loan manufacturing operations and quality of loans in which to feel comfortable making loans in each of the described categories. Regardless of one’s position residential mortgage lenders will have to be prepared to operate within compliance with the rules starting on January 10, 2014.
For loans being sold to Fannie & Freddie that have a DU or LP accept, it will be business as usual. Why? Both Fannie & Freddie (F&F) are exempt from the more extensive ATR underwriting at a 43% DTI provided the loan qualifies as a low risk low fee QM loan. The rule refers to this as the Temporary QM and it will exist for seven years or until they come out of government receivership, whichever comes first. The rule and F&F make it clear that if the automated underwriting (AU) system approves as Eligible/Accept a loan, even if the debt to income (DTI) is above the 43% max ratio, the loan will still be accepted by F&F and as a result, the lender will have originated a QM. Whether the QM obtains Safe Harbor or Rebuttable Presumption depends on whether the QM is High Priced or not (APR exceeds APOR threshold). Safe Harbor QMs are low priced and Rebuttable Presumption QMs are high priced. The High Priced APR to APOR calculation is the same as the HPML calculation. RPM does not do HPMLs so RPM will not do High Priced QMs.
So what happens if a loan submitted to F&F does not receive a DU or LP accept? At that point the lender has a few options:
- A manual underwrite is permitted by F&F and the lender has to accept that the loan would then have more harsh rep & warranties but can still have a Safe Harbor QM.
- Repackage the loan to see if it meets the guidelines of FHA or a non-government lender.
However, in all cases the lender will have to assess the borrower’s Ability to Repay (ATR), which consists of the following eight factors:
- Current or reasonably expected income or assets
- Employment status, if the creditor is relying on employment for repayment
- Monthly payment of the loan
- Monthly payment on a simultaneous loan secured by the same property
- Monthly payment for mortgage-related obligation
- Current debt obligations, alimony & child support
- Monthly debt-to-income ratio (DTI) or residual income
- Credit history
RPM Mortgage fully expects to engage in:
- Non-QM Loans
- QM Safe Harbor Loans
We agree with the CFPB that Non-QM Loans are still considered to be viable loans, which benefits the borrower and the end investor. Yes, these loans will be manually underwritten and if RPM feels confident that the loan meets the described ATR guidelines listed above, though we will not have the legal safe harbor of a QM loan, we will indeed make the loan. What will be most interesting to see is the appetite by private label investors to own these loans. Adding to the chaos is waiting for the opinions of the rating agencies, who will determine the ‘risk factor’ to investors looking to buy Non-QM loans. They play an extremely important role in the Private Label Securities (PLS) market because many types of institutional investors are prohibited from buying private label mortgage backed securities (PMBS) without a rating from one of the major rating agencies such as Standard & Poors (S&P), Fitch, Moody’s & DBRS.
As for QM Rebuttable Presumption Loans, which are loans that meet the ATR rules but have an interest rate that exceeds the Average Prime Offering Rate (APOR) for comparable transactions by 1.5% or more, this calculation is consistent with the HPML calculation. While the rule only applies to consumer credit, F&F are applying the QM limits to all transactions. RPM will originate investment property loans that exceed the APOR but will not receive any legal protection due to the exclusion of investment property from the definition of consumer credit under Reg Z.
What is the value of the QM Protections? Now, that is the billion dollar question! Why? Because no one really knows how much QM Safe Harbor Protection will be given until the first plaintiff lawsuits end up in court and the facts of whether or not the lender properly underwrote the borrower’s Ability to Repay! In the meantime the second biggest question of the day is: will the new QM rule slow down home buying and refinancing, which are the backbone of the US economic engine? Will lenders want to stop doing residential loans because they have become too litigious?
2014 is certainly set to be a transition year for residential mortgage finance but one thing is certainly clear to me … water will always find its own level and capitalism is a creative animal that has the ability to morph to a new environment. I suspect that there will be short term pain … mid term adjustments … and a new era in lending.
(For more information than you can digest and the source of data for this piece, visit http://www.aba.com/Issues/QM/Pages/default.aspx)