Here’s a little twist on the QM rules. Congress is considering a slight modification to the QM rules which would treat some loans held in portfolio by a Bank as a QM loan (New QM).
My understanding of the law is that any loan held in portfolio by a Bank, like any other loan, would be considered a QM when it meets all the criteria already outlined in the law. Otherwise, the loan must meet the rules for repayment ability. I thought that was the intention of the law.
The law now allows for some exceptions to the QM criteria. Loans purchasable or guaranteed by Fannie or Freddie, insured by FHA or VA, or guaranteed under the USDA programs are considered as QM loans.
These exceptions are set to expire in January of 2021. These exist to allow for a soft landing in determining the effects the new rules on home financing. It was initially feared the rules would have major adverse effects on mortgage lending. I believe that was not intended under the new rules.
This is where the rules of unintended consequences kick in. The intent of these rules was to protect the consumer while providing some stability to the home financing market. It was to create a more stable investment vehicle through better quality loans with the borrower’s ability to repay to ensure expected loan performance. However, some believe the rules limit the availability of adequate home financing to first-time homebuyers and those with low to moderate income. An unintended consequence.
Enter Fannie and Freddie with their 97% LTV loans and FHA with their reduced annual MI premium. Both with the intention of increasing the availability of home financing to these buyers and making it easier for them to qualify for a mortgage. Unintended consequence: raise the risk level of the loans guaranteed by the agencies and insured by FHA.
This unintended consequence increases the risk of losses to Fannie, Freddie, and FHA. Such losses will adversely affect their capital and ability to guaranty or insure future loans. Not so good for the consumer, the mortgage industry, the housing market, the economy or the taxpayers. Who will bail these agencies next time?
Now here comes Congress to try and fix things by allowing a Bank to receive the QM safe harbor protection for their loans held in portfolio. Why? So they can originate what would otherwise be considered a non-QM loan and still receive this protection? Would this provide Banks with a competitive edge over Independent Mortgage Bankers? What is different about a loan originated for a Bank’s portfolio versus one originated for sale to Fannie Mae or Ginnie Mae? Was the QM status created only to protect Wall Street?
I think the intention is to remove the stigma for Banks of the ATR risks associated with originating non-QM loans so they might assist more homebuyers, and increase homeownership. The unintended consequence is an increase in risk to Banks by originating non-QM loans without the due diligence to ensure compliance with all ATR requirements. This increases the risk for defaults resulting in increased losses to the Bank. Who will bail them next time?
It’s not a simple answer. Congress can ease the restrictions and requirements for QM and/or non-QM loans to try and help spur homeownership. Is that the answer? Or, do we need more jobs and higher wage opportunities so potential buyers may qualify under existing criteria? At the end of the day, it all comes down to the consumer’s ability to repay the debt so they can retain the home and the loan performs as expected. All lenders must be diligent in originating quality loans that are a solid investment vehicle for Bank’s and/or Wall Street. QM or non-QM, a lender must confirm that the consumer has the ability, and willingness, to repay the loan.
Otherwise, the unintended consequence may be a repeat of the collapse of 2008.