Although they may be considered a little riskier than your standard QM (Qualified Mortgage), the perceived risk is in not having the QM’s safe harbor from repayment ability requirements.
Some loans may have loan terms, i.e. interest only features, which disqualifies them as a QM. That alone does not have the loan fall into a subprime category.
Let’s remember some of the infamous, subprime loan features, which got us into quite a bit of trouble.
- Low Doc
- No Doc
- No Income
- No Asset
- No Nothing loan!
Come on, the non-QM loans of today are nothing like the subprime loans of yesterday.
When doing a non-QM loan, a lender still must follow all TRID requirements and validate the borrower’s ability-to-repay the debt.
This means a full vetting of the applicants, with employment, income and asset verifications, just as done for a QM. These are complete full doc loans made to qualified borrowers, just under slightly different terms.
To offset some of the risk, a lender may charge higher rates and fees, as long as they can still demonstrate the consumer’s ability-to-repay. That’s the key and what differentiates the new non-QM from the old sub-prime loans.
Presently, CFPB is the process of doing their assessment of the success/failure of the QM/ATR rules.
One area they are reviewing is the difference between the QM and non-QM loans. Should more non-QM loans of today qualify as QM loans in the future? Labeling Non-QM as subprime surely won’t help.
Lenders need not fear non-QM loans when originated and underwritten properly. After all, what lender in its right mind would make a loan to a borrower who didn’t have the ability to repay?
You don’t have to answer that, just don’t be one.