Be Care­ful What You Wish For

National Mortgage News - - Editor’s Desk -

The Con­sumer Fi­nan­cial Pro­tec­tion Bureau’s pend­ing “five-year lookback” of the qual­i­fied mort­gage rule may lead to QM be­ing re­de­fined with looser stan­dards. As this month’s cover story ex­plains, th­ese ef­forts stand to cre­ate more op­tions for the mort­gage in­dus­try, but they will also re­quire lenders and in­vestors to re­cal­i­brate the lev­els and types of credit risks that they’re will­ing to take.

On the sur­face, chang­ing QM by low­er­ing the re­quire­ments for loans that re­ceive safe har­bor pro­tec­tion seems like a clas­sic, “get the govern­ment out of the way of busi­ness” move. But with seem­ingly no end in sight to the govern­ment con­ser­va­tor­ship of Fan­nie Mae and Fred­die Mac, loos­en­ing QM has the po­ten­tial to ac­tu­ally in­crease the fed­eral govern­ment’s in­volve­ment and ex­po­sure to the mort­gage mar­ket.

Fan­nie and Fred­die al­ready buy loans that fall out­side of the stan­dard QM def­i­ni­tion. But be­cause of a tem­po­rary pro­vi­sion known as “the patch,” th­ese loans re­ceive QM sta­tus be­cause they’re pur­chased by the GSEs. The same waiver ap­plies for loans that re­ceive govern­ment guar­an­tees, such as the Fed­eral Hous­ing Ad­min­is­tra­tion in­surance pro­gram. The QM waiver the GSEs and govern­ment loans en­joy isn’t per­ma­nent, and is set to ex­pire in 2021, ab­sent an ex­ten­sion or ear­lier end to the GSE con­ser­va­tor­ship.

In other words, if any other pri­vate sec­ondary mar­ket in­vestor were buy­ing th­ese loans, they wouldn’t qual­ify. As a re­sult, the bound­aries of the non- QM mar­ket have been set not by the statu­tory pro­vi­sions of QM it­self, but by Fan­nie and Fred­die’s cri­te­ria.

It’s un­clear whether re­lax­ing QM would move the stan­dard be­yond the cur­rent cri­te­ria of agency- el­i­gi­ble loans. But if it does, the GSEs will have a choice to make: stick to their ex­ist­ing credit box, and lose mar­ket share to a new “pri­vate- la­bel QM” mar­ket; or open up their credit box even more and lever­age “the patch,” to gain an edge over the pri­vate mar­ket.

The GSEs have been re- es­tab­lish­ing their com­pet­i­tive spirit for years now, rolling out new prod­ucts and tools to help lenders bet­ter as­sess and man­age risk. To be sure, much of those ef­forts have been ben­e­fi­cial to the in­dus­try over­all and make the orig­i­na­tions mar­ket safer for all in­volved.

In any event, the non- QM mar­ket, which fi­nally started to come into its own last year, is also in dan­ger of be­ing squeezed by an ex­panded QM uni­verse. In that case, lenders and in­vestors will have to de­cide how far down the spec­trum of non- QM they’re will­ing to go in search of profit.

It’s en­tirely con­ceiv­able that with the right tools in place, lower QM stan­dards — and per­haps even lower agency stan­dards — could safely open up the mar­ket to more bor­row­ers. But it’s a slip­pery slope, and one that could eas­ily spin out of con­trol.

Send your com­ments, ques­tions and story ideas to Ed­i­tor in Chief Austin Kilgore: austin.kilgore@source­me­

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