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The other day, I wrote about a bill pending in Congress that would make any loan, made by a Bank and held in portfolio, a bona fide QM (Unintended Consequences). It seems this has stirred some debate; not my blog but the issue of the Bank’s portfolio loan’s QM status (Controversy).
At issue is whether a loan is of better quality and deserves to carry the QM safe harbor just because it is held by the Bank as an investment in their portfolio. Some say yes and some say no. Who is right?
As usual it all depends on your viewpoint. If you watch sports you know that the instant replay doesn’t always make it crystal clear. When something is viewed from different angles or perspectives, the outcome may seem clear but quite different. That’s why we have judges, referees, and umpires. Somebody has to make the call. In this case, it will be Congress.
Should a Bank get the QM safe harbor protection just because they decide to hold a loan in their portfolio? If that loan is otherwise a non-QM loan, which would be bound by the rules of repayment ability, what makes it different? Is the loan somehow safer because it is made and held by the Bank? Is the consumer better protected? Fodder for a great debate.
The Banks are making the same arguments used to gain exemption of their originators from education, testing and licensing requirements under the SAFE Act. They say that Banks are already heavily regulated and audited. As a result, the loans they make and portfolio are a better risk and well underwritten so as to protect both a consumer and the Bank.
This means, if a Bank’s portfolio loan were to default, the consumer would not have the ability to repay protection normally afforded them under the law. The Bank would be exempt from such an action because of the law’s QM safe harbor. It seems counterproductive.
Pass a law because the consumer needs protection and then bypass the protection afforded the consumer under the law. It all depends on how you look at it.
The argument is that the Bank will be more careful because they get penalized by a consumer’s default since they hold the loan as an investment. If the loan doesn’t perform, they lose money. This is true. But, what does that have to do with whether a loan is QM or not.
If the Bank creates a product as an investment and properly underwrites each loan, then why all the fuss? Do they need the QM safe harbor? Could the safe harbor backfire? Might a Bank originate and hold riskier loans that would otherwise be non-QM loans? If these loans default at a higher rate, regardless of the safe harbor, the Bank will suffer greater losses. That’s not good for the Bank nor its depositors. Does this make Bank’s too big to fail? Is that good for the taxpayers?
From the Bank’s perspective, their portfolio products will be carefully designed to be safe investment options. The applicants will be diligently reviewed to ensure they qualify for the loans and have the ability to repay the debt. The Bank will have “skin the game” by using their money to fund the loans. All this, they say, is why they should receive the safe harbor protections afforded by the QM status.
Odd, consumer groups and Independent Mortgage Bankers, look at the same circumstances and say just the opposite. For these reasons, the loans should remain as a non-QM without a safe harbor so the consumer, the Bank, the industry and the taxpayers are all properly protected.
A little over a year ago everyone in lending agreed. There was no need for the QM or ATR rules, so no need for the safe harbor. My how things have changed!
The game sure has changed; is it time to play different?
