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Report: Only Half of Originations Today Would Qualify for QM

Sorohan, Mike
CoreLogic, Santa Ana, Calif., said less than half of total mortgage originations today would qualify under the Consumer Financial Protection Bureau’s Qualified Mortgage rule if there were no exemption for the government-sponsored enterprises.

The CoreLogic analysis of more than 2.2 million loans said the short-term impact of the Qualified Mortgage rule would be minor because of seven-year GSE and FHA exemptions; but even in the longer-term, only half of today's originations meet eligibility requirements for the rule's "safe harbor."

"The impact will be felt most in the boom-bust states and some Southern and Midwestern states," said CoreLogic Analyst Sam Khater. "The impact on the jumbo market next year is moderate relative to the conforming market."

The rule creates general requirements for a Qualified Mortgage that addresses product standards, minimum underwriting and documentation requirements, such as a 43 percent back-end debt-to-income ratio and limits points and fees to 3 percent of total loan amount for most loans. 

The rule provides a “temporary” exception from some underwriting requirements, particularly the 43 percent back-end DTI requirement, for loans that are eligible for purchase, guarantee or insurance by the GSEs while they are under conservatorship, or HUD, VA or the Department of Agriculture’s Rural Housing Service. 

For loans that meet the general QM standards, the rule provides two different types of legal protection: (1) Safe Harbor QMs where the loan’s APR is less than or equal to 150 bps over the Average Prime Offer Rate benchmark and (2) Rebuttable Presumption QMs where the APR is more than 150 bps over the APOR. The rule also outlines the factors a lender must take into account for non-QM loans to satisfy Dodd-Frank’s Ability to Repay requirement.  

CoreLogic said the 43 percent DTI ratio ceiling eliminates nearly one-fourth of all originations from the QM pool. Additionally, when combined with implementation of final Qualified Residential Mortgage rules, nearly 60 percent of loans currently originated would be exempt, with 48 percent of qualified originations not eligible for the QM pool without the GSE exemptions.

"QM was implemented to minimize risk layering, which magnifies risk in unexpected ways," Khater said. “Will it succeed? In [our] view, the answer is a resounding yes. While QM and QRM remove 60 percent of loans, they remove more than 90 percent of the risk space, the DTI rule removes 36 percent of all serious delinquencies, followed by loans with credit score of less than 640 (28 percent of SDQs) and the 10 percent down payment (18 percent of SDQs)."

The report also said the impact on the jumbo market, which represents 10 percent of the current market, would see minimal impact, with no significant “shake-up” until 2014. Even then, Khater said, nearly two-thirds of current jumbo originations would meet the QM rule’s safe-harbor.

"Similar to the overall market, DTI and low or no documentation combined have the largest impact, accounting for 30 percent of the jumbo market," Khater said. "Since down payment requirements are much higher for jumbo loans than conforming loans, the impact of [QRM] is smaller for jumbo loans than for conforming loans."

The report said Nevada would be most impacted by QM, with just 42 percent of loans meeting the safe harbor requirement. Other states that would see heavy impact include Hawaii (43 percent), Alaska (44 percent) and "boom-bust" states such as California, Arizona and Florida. By contrast, Massachusetts would have the least impact, where only 6 percent of loans qualify, along with other above-average household income states such as New York, New Jersey and the District of Columbia.

"While the QM and QRM rules assist in carving bright lines to delineate 'safe' products and provide consumer and investor protections, clearly they are not a panacea," Khater said. "The impact of QM in the short-to-medium term will be small and ironically reinforces the role the GSEs play in the market."
 
Khater added that the rule the rule will have an enormous positive impact on future performance. "From a cost-benefit perspective, the largest impact on performance is from credit scores and down payment, as a 1 percent reduction in originations of loans with credit scores of less than 640 and loans with less than 10 percent down payment will reduce serious delinquencies by 6 percent and 2 percent, respectively," he said.