Be Careful What You Wish For
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: firstname.lastname@example.org