NEW YORK--()--Fitch believes the qualified mortgage (QM) definition is positive for the jumbo prime residential mortgage market, as it removes the uncertainty that has paralyzed mortgage lending for the past few years and is an encouraging step in easing credit for traditional prime borrowers. Further, finalizing the rule on QM will help advance the determination of a qualified residential mortgage (QRM), an additional constructive step in re-starting the jumbo securitization market.
The QM announcement is a positive step toward finalizing risk retention and premium capture rules for securitizers of residential mortgages. Given that the QRM definition for exemption from these rules is linked to that of the QM, the back-end debt-to-income (DTI) requirement for a QRM is now clear. However, a key component of the QRM guideline not addressed by the CFPB is the downpayment requirement. Fitch believes finalization of the QRM hinges on that definition, which is expected to be determined sometime in 2013, as the agencies were waiting for QM to be defined before finalizing QRM. Ultimately, the re-start of private label securitization market will depend on this definition and clarity on risk retention rules, the application of Basel III and other liquidity rules, and a decision on agency guarantee fees.
With respect to non-subprime mortgage lending, the future is more uncertain. The final rule makes a meaningful distinction between two types of mortgages based on their risk profile and pricing. For "higher priced" mortgage loans generally made to riskier borrowers (i.e. defined as loans priced 1.5 percentage points above the average prime offer rate index), the final rule provides for a rebuttable presumption, allowing for borrowers to take legal action against the lender and its assignees if they can show that there was insufficient income to meet living expenses at the time the loan was originated.
In defining QM, the Consumer Financial Protection Bureau (CFPB) established the legal protection afforded to lenders and their assignees if a loan meets certain standards. Specifically, a lender will be presumed to be in compliance with the ability-to-repay requirement and, thus, given a safe harbor from legal action if a mortgage loan is not a higher priced mortgage, is underwritten to the eight factors, and meets the following criteria:
- No interest only, negative amortization, and balloon payment terms.
- Maturity is limited to 30 years.
- Underwritten to programs that verify borrower income and assets.
- Points and fees paid by the borrower cannot exceed 3% of the total loan amount.
- The back-end debt-to-income ratio (DTI) is 43% or less.
A temporary (seven years) exception to the DTI threshold is permitted if the loan otherwise would meet the general requirements of the government sponsored enterprises (i.e. conforming loan balance) for as long as they are under conservatorship and other government agencies, such as Department of Housing and Urban Development (HUD) and Department of Veterans Affairs.
The 43% DTI threshold casts a wide net for qualifying jumbo prime and possibly strong alt-A credit quality borrowers. Roughly 83 % of the loans comprising recent securitizations would likely comply with the QM standard. The ruling is likely to have the biggest impact on securitizations of interest-only and higher DTI loans associated with the more affluent borrowers.
The CFBP's final ruling includes an ability-to-repay determination that establishes certain parameters creditors must consider when underwriting a prospective borrower. The new rule sets eight minimum "common sense" underwriting factors as part of the ability-to-repay evaluation, including full documentation of borrower income, assets, employment status, and leverage. Further, lenders must also use reliable third-party records in their evaluation of these factors. Fitch does not believe these minimum factors will have a material impact on current mortgage underwriting, as lender processes and guidelines have improved significantly post-crisis.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.