Report: Ability-to-Repay, QM Requirements are ‘Good Business’

Today's resilient capital market has the capacity to adapt readily to the pending ability-to-repay and qualified mortgage (QM) rules set to take effect January 10, 2014, according to a white paper ""CoreLogic"":http://www.corelogic.com/ released Friday.

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The paper titled, ""_ATR/QM Standards: Foundation for a Sound Housing Market,_"":http://www.corelogic.com/research/atr-qm-white-paper/17-atrqrstds-1013-00-atr-qm-standards_foundation-for-a-sound-housing-market-final-102513.pdf provides an overview of the rules themselves and examines their possible impact on the market.

The ability-to-repay rule requires lenders to take eight borrower attributes into consideration: ""borrower's current income or assets; current employment; the monthly payment for the loan, as well as any other loans secured by the same property; monthly payments for property taxes and insurance for which the borrower is responsible; current debt obligations; the borrower's monthly debt-to-income ratio or residual income; and credit history,"" according to CoreLogic.

A ""Qualified Mortgage"" meets a set of standards that provide ""safe harbor"" for lenders. These mortgages are automatically considered to be compliant with the ability-to-repay rule.

""To be QM-eligible, a loan has limits on points and fees to be paid, as well as underwriting features allowed,"" CoreLogic stated.

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For the first seven years under the new regulations, loans that meet the purchase requirements for the GSEs, or the underwriting standards for the ""Federal Housing Administration,"":http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration the ""Veterans Administration,"":http://www.va.gov/ or the ""U.S. Department of Agriculture,"":http://www.usda.gov/wps/portal/usda/usdahome ""fall into a temporary exemption and are considered QM as long as the loan provides for no interest-only payments, has a term that does not exceed 30 years, and meets the QM limitations on points and fees,"" CoreLogic stated in its white paper.

After much debate and push-back from the industry, the ""Consumer Financial Protection Bureau"":http://www.consumerfinance.gov/ ultimately decided not to include a down payment minimum in the QM definition. In doing so, ""the CFPB preserved the opportunity for higher LTV loans to remain QMs, when possible,"" CoreLogic stated.

As for the ability-to-repay rule and QM's effect on the industry, CoreLogic offers general support for the rules and suggests the industry will continue to prosper--albeit with more caution than in the years leading up to the housing crisis.

""Making sure a borrower has the ability to repay is good business,"" CoreLogic stated.

""Mortgages carry an expectation of repayment; it does not make sense to approve a loan application for a consumer who does not have the wherewithal to make regular interest and principal payments,"" CoreLogic continued.

Some worry there will be no market for non-QM loans, wondering whether investors will be willing to take risks in such a segment of the market.

CoreLogic concedes, ""It is fairly certain that the lending of the pre-crisis years will not return,"" but suggests lenders will ""figure out a way to deliver qualified and non-qualified mortgages in a way that meets all the regulatory requirements, incorporates sound lending and consumer protections, and makes a profit.""