“Five years have passed since the Consumer Financial Protection Bureau (CFPB) issued regulations to provide safer and more sustainable home loans for consumers, known as Qualified Mortgages (QMs),” said Archana Pradhan, Senior Professional, Economist, Office of the Chief Economist at CoreLogic. In her blog entitled, “Characteristics of Today’s Non-Qualified Mortgages” Pradhan looks into how much has changed in the non-QM sector.
According to Pradhan, today’s non-QMs are high quality and are vastly different and safer than their pre-crisis counterparts. CoreLogic data revealed that in 2018, the average credit score of homebuyers with non-QMs was 760, compared to a score of 754 for homebuyers with QMs. “The average first-lien LTV for borrowers with non-QMs was 79 percent compared to 81 percent for borrowers with QMs. However, average DTI for homebuyers with non-QMs was higher compared with the DTI for borrowers with QMs,” the blog reads.
“Although the non-QM market is just a small piece of today’s mortgage market, it plays a key role in meeting the credit needs for homebuyers who are not able to obtain financing through a GSE or government channels,” she said. “Creditworthy borrowers not applying for GSE or government-insured loans may benefit from non-QM options. These may include self-employed borrowers, first-time homebuyers, borrowers with substantial assets but limited income, jumbo loan borrowers and investors.”
Shedding light on ability-to-repay (ATR) rule, she pointed out that it came into being after the Dodd-Frank Wall Street Reform and Consumer Protection Act imposed an obligation on lenders to make a good-faith effort to determine that the applicants have the ability to repay the mortgage. Pradhan noted that the act “mandates that QM loans cannot have risky loan features like negative amortization, interest-only, balloon payments, terms beyond 30 years or excessive points and fees.”
“Any home loan that doesn’t comply with the QM rules is called non-QM. A non-QM loan is not necessarily a high-risk loan, it’s merely a loan that doesn’t meet the QM standards. Examples of a non-QM loan include interest-only or limited/alternative documentation loans. A non-QM loan still needs to satisfy the ATR requirements,” Pradhan added.
Listing the criteria to be qualified for QM loans, Pradhan noted that it must satisfy at least one of the following three criteria:
- Borrower’s debt-to-income (DTI) ratio is 43 percent or less
- The loan is eligible for purchase, guarantee or insurance through the Federal Housing Administration, Veterans Affairs, United States Department of Agriculture or a government-sponsored enterprise (GSE), regardless of the DTI ratio
- The loan was originated by insured depositories with total assets less than $10 billion and must be held in portfolio for at least three years.
Speaking of the expansions in the non-QM market, Pradhan said that it is up by 1 percentage point from 2017 to 2018, and represented about 4 percent of 2018 originations. She added that despite having DTI ratios that are higher than conventional QM loans today, non-QMs are performing very well.
Read the full blog here.