Analyzing Seasoned QM Loans

The Consumer Financial Protection Bureau (CFPB) in December issued two rules meant to promote access to what the bureau called "responsible, affordable mortgage credit." A group of researchers is taking a closer look at these recently issued rules in an effort to understand their implications for housing.

According to the CFPB, the first of the new rules, the General QM Final Rule, replaces the requirement for General QM loans that the consumer’s debt-to-income ratio (DTI) not exceed 43% with a limit based on the loan’s pricing. In the second final rule issued in December, the Bureau created a new category for QMs, Seasoned QMs.

At the time, the bureau said its two new rules will "support a smooth and orderly transition away from the Patch and maintain access to responsible, affordable mortgage credit upon its expiration."

The paper by research fellows Karan Kaul, Laurie Goodman, and Jun Zhu analyzes historical loan performance to learn more about this Seasoning QM Rule, which would provide a three-year pathway to "safe harbor for loans that are rebuttable presumption or nonqualified mortgages at the time of origination," according to the paper's abstract.

"This analysis shows that loan performance during the first three years is a better predictor of subsequent loan performance than the rate spread [which is determined by
origination characteristics]," the researchers noted. "Specifically, we find that higher rate-spread loans that performed well during the first three years had lower long-term serious delinquency rates than safe-harbor loans that performed poorly in the first three years. The seasoning QM rule will help address this inconsistency."

Within the study, the researchers also touch on the impact of the new rules insofar as their significance to oft-disenfranchised borrowers and/or prospective homeowners.

They point to earlier work on the QM rule and their findings that higher-rate-spread conventional lending, especially in the non-GSE space, is a crucial source of credit for racial and ethnic minorities, first-time homebuyers, households with limited means, or others who do not qualify for government-backed lending, including self-employed and gig-economy workers with nontraditional sources of income.

"The seasoning pathway to safe harbor is not a panacea, as banks and other portfolio investors tend to hold relatively few of these loans, but at the margin, the pathway will expand the credit box," the researchers wrote. "We acknowledge that this consumer segment is more susceptible to getting overcharged, as they likely shop around less and have fewer lending options to choose from. But we also cannot ignore the fact that sustainable homeownership is the only viable path to wealth creation for these households, and the availability of a seasoning pathway to safe harbor will likely increase lending options available to them."

The entire study is available at urban.org.