Much has been said and written about Ability to Repay (ATR), Qualified Mortgages (QM) and lenders preparing for the new realities in lending. However, I’d like to talk a little about the “oops” loan.

There are many reputable outside vendors that are already serving as compliance checks for lenders to make sure the loans are compliant QM/ATR loans. Thus far, some compliance firms have reported up to 20% of loan submissions for third-party reviews have not quite passed the “litmus test” as it relates to the points and fees cap test for QM compliance.

Eventually lenders and compliance firms will understand the rule and become more consistent in their approach, meanwhile the “scratch-and-dent” market is expected to grow this year as loans that started with the intent to be compliant are determined to be non-QM.

I refer to these as the “on the border non-QMs,” where something in the loan file makes these loans ineligible for purchase to the GSEs or they may have a higher DTI than the 43% limit. Whatever the reason is, a loan deemed non-QM is not reversible or able to be cured under current legislation.

The need to sell or keep a loan in portfolio has to include the potential litigation risk associated with that loan. Initially we expect the secondary market will mark down the price of these loans because of the unknown risk. This can be a significant yield play for the scratch-and-dent buyer in the new QM world.

As for flow buyers in this market, most are currently jumbo portfolio lenders who are committed to making or acquiring Interest-Only (IO) loans. Some are comfortable originating jumbo loans with higher DTIs and feel they can still comply with ATR. I believe that there will continue to be more entrants in this space as depository institutions become more comfortable with the potential risk associated with a non-QM loan.

Additionally, private equity funds and hedge funds will not remain on the sidelines very long — especially if they see a yield play and can better understand the litigation risk associated with non-QM loans. As a result, I expect more investors to enter into this arena over time.

The credit union space is the wild card. Some CUs throughout the country acquire portfolio loans from smaller originators. I can easily see them participating in the non-QM space and becoming active participants in the new QM world.

For those borrowers who have had credit issues and need to get back on their feet before they can obtain market rates there is a market that is just forming and could become a good source for lenders. It is the private money lending offerings, both on a brokered basis and a correspondent basis. The LTVs are lower than in the past, so I expect this market to grow slowly. Volumes are small in this segment, but I do expect this area of the business to grow.

Some investment bankers and private equity firms are teaming up with a few handpicked originators to roll out these programs on a national basis. For some really good news for non-banks, some warehouse banks have embraced this market concept, provided there are at least three legitimate take-out investors for the product.

Even the Consumer Financial Protection Bureau recognizes that non-QM loans can be good loans. More and more, it is becoming a focus at the conferences I attend and with customers I talk to. If you’d like to discuss this further, please contact me, or your local MGIC Account Manager, www.mgic.com/directory.

What are your thoughts on Qualified Mortgages? We’d love to hear them. Share in the comments below!

Lloyd San

Lloyd San - Retired MGIC Mortgage Market Manager

A 30-year mortgage industry veteran, retired in 2021, Lloyd San served as Mortgage Market Manager for Mortgage Guaranty Insurance Corporation (MGIC). Overseeing a national effort, he was responsible for managing all client-related capital market activities in the areas of bulk and correspondent loan referrals, investor introductions, structured products, whole loan sales, as well as product and personnel introductions.

In addition, he is chairman of the California Mortgage Bankers Association, Secondary Marketing Executive Committee and also serves on the Western Secondary Conference Committee.

A graduate of San Diego State University in California, Lloyd received his MBA in Financial Management from National University. He also holds a California Real Estate Broker’s License.

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