The revised QM rule and potential effect on the non-agency market
The revised Qualified Mortgage (QM) rule will likely not go into effect until October 1, 2022–more than a full year past the initial deadline of July 1, 2021 set by the Consumer Financial Protection Bureau (CFPB). The rule states that government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, would move to a price-based model instead of using debt-to-income (DTI) ratio to determine a borrower’s ability to repay. Citing the pandemic as an obstacle, the CFPB’s Acting Director Dave Uejio says they want to ensure that “responsible, affordable mortgages remain available.” This new price-based approach dictates that the annual percentage rate (APR) on the loan does not exceed the average prime offer rate (APOR) for a comparable transaction. For loans to qualify as safe harbor, the APR cannot exceed the APOR for a comparable transaction by 1.5 percentage points or more for a first lien transaction. Safe harbor qualification is a protection for lenders against borrowers who try to sue claiming the lender provided them with a mortgage which the lender did not believe they could repay. Ability to repay was a serious issue that was a main factor in the 2008 housing crisis. This ruling by the CFPB means that lenders have more time to take advantage of the QM patch. That patch allows QM status for loans that are sold to Fannie Mae or Freddie Mac. Some originators had already started moving to the new pricing model, but now they have more time to make the adjustment and will likely be working under both standards for some time in order to be prepared. Speaking on a panel during the 2021 IMN Jumbo Virtual Symposium, MAXEX President and COO Bill Decker gave his thoughts on how this new rule will affect the non-agency mortgage space. Decker said, “Moving to APOR is going to free up a lot of compliance oversight in terms of the manufacturing.” Decker continued, saying “I believe it’s something like 40% of the jumbo mortgages that went into non-QM deals will become QM eligible under the APOR rules. So that’s going to significantly alter and transition some of the burden, which has been significant, in the non-agency market.” Also, while this rule is generally accepted on paper as being a better, more accurate measurement of ability to repay than DTI, it is still untested. MAXEX Managing Director of Capital Markets and Head of Buyer Relations Charlie Wickliffe says, “The new QM rule is going to have to go through a period of performance analysis. I think trying to understand the credit implications of a growing footprint for the prime QM jumbo space is something that the market is going to be working very hard to understand. And certainly, our investors are spending a lot of time focusing on that right now and for the coming months.” Decker also noted the potential that this revised rule has to create a more competitive marketplace for high-quality loans. “With the new APOR rule, it creates an interesting competitive landscape because the private market can now get a safe harbor, QM eligible asset through APOR and get that into a securitization,” says Decker. “So that creates a very interesting opportunity for the private market to compete against the GSEs and the MIs for those high LTV assets.” ABOUT THE QM RULE The most important factor in determining if someone qualifies for a home mortgage is their ability to repay the hundreds of thousands of dollars they’re asking to borrow. The 2008 financial and housing crisis exposed years of subprime lending standards with originators issuing mortgages to people who they knew were far less likely to be able to repay. That resulted in foreclosures, margin calls for investors and the housing bubble collapse. As part of the Dodd-Frank Act, the CFPB was formed to help protect consumers from predatory lending practices. One tool implemented to ensure best lending practices was the QM rule. This required that borrowers have a DTI ratio of no more than 43%. This means that their amount of income exceeds their amount of debt by a certain percentage, making it less likely they’ll default on the loan. The QM patch was created to ensure the GSEs, Fannie Mae and Freddie Mac, could have an exception to the rule and lend to borrowers who had less than perfect DTI. This patch was always meant to be a temporary measure and was set to expire in January 2021. That expiration date was pushed back to July 1, 2021 and there is currently a push to extend that date out to October 2022.