Non-QM loans' cool reception.

Author:Ostrander, Matthew
Position:ORIGINATION
 
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Consider the plight of a would-be borrower who, despite being a very good risk for a mortgage loan, is not eligible for a Qualified Mortgage (QM). The reason this particular borrower isn't eligible is because she doesn't fall neatly within all of the QM guidelines. Maybe her debt-to-income (DTI) ratio is higher than that magic number 43, despite her considerable disposable income. [paragraph] Or consider a mobile-home park owner who has plenty of income documented on his tax returns but does not want to go through the hassle of providing the complete lease copies for each space--making him ineligible for a Qualified Mortgage per Appendix Q of part 1026 of the Truth in Lending Act (Regulation Z). [paragraph] The fact is these people are good risks. And mortgage lenders exist to provide the ability to achieve homeownership to qualified borrowers.

So, as long as borrowers' ability to repay is properly qualified according to the requirements of the ability-to-repay (ATR) rule, a lender should be comfortable giving them a non-QM loan.

Even though some people don't meet the QM guidelines, many of them can repay a mortgage and are good risks. After all, not all borrowers with DTI ratios of 44 and higher are created equal--and neither are all non-QM loans.

The industry to date has been hesitant to embrace this space for a variety of reasons. First, most lenders are plenty busy with a steady flow of QM loans these days, so they don't need to supplement their business with non-QM products per se. Not only that, borrowers who fall slightly outside the QM standards but who are otherwise excellent credit risks have difficulty accepting the higher rate that typically comes with non-QM loans. Then there is the lingering memory of the huge problems associated with subprime loans and the tendency for lenders to mistakenly lump them in the same category as non-QM loans; they don't understand the differences between subprime and non-QM underwriting.

And finally, there is not much of a secondary market interested in buying non-QM loans--at least not yet. Primarily higher-yield, fast-money buyers of credit risk are the predominant players--the slow money is sitting out and waiting for more data to calibrate the risk.

Simply put, the non-Qualified Mortgage space is tremendously misunderstood.

The truth is, there is a much greater risk to lenders if they do not participate in the non-QM marketplace. The slower the industry is to adopt these products as viable alternatives for creditworthy borrowers, the slower the housing recovery will be--which will impact the nation's economic recovery as well. We should be running at these loans, not from them.

Biggest misconception: A non-QM loan is a poor credit risk

This sizable market is comprised of various niches that can be deemed safe enough to compensate for the perceived risk they carry--which for most lenders is the potential for future litigation. With all the data we now have from the Great Recession, it is not a stretch to say that risk can be thoroughly quantified and understood if carefully modeled using accurate...

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