A new study found that the Qualified Mortgage designation doesn’t impact projected defaults. But the QM label does have an effect on projected severities.
The final Ability-to-Repay rule was issued on Jan. 10 by the Consumer Financial Protection Bureau. The rule goes into effect on Jan. 10, 2014.
Lenders will be required to make a reasonable and good faith determination that the borrower is capable of repaying a loan before making an offer to lend.
The rule was discussed by Morningstar Credit Ratings LLC in its RMBS Commentary: Qualified Mortgage Rule and Securitization and based on discussions with “key market participants” and an analysis of a variety of reports.
Among factors to be considered by lenders are income and employment, assets, total payments versus income, and credit history.
Lenders can be protected against claims of violating the Ability-to-Repay rule by originating Qualified Mortgages. Such loans don’t include interest-only payments, negative amortization or balloon payments. Loan terms are limited to 30 years, fees are restricted and back-end debt-to-income ratios can’t exceed 43 percent on QMs.
But even if a loan isn’t QM-designated, Morningstar said proper underwriting can still be demonstrated by showing compliance with the Ability-to-Repay standards.
The QM-Safe Harbor applies to loans where the interest rate is no more than 150 basis points over the average prime offer rate for first mortgages and no higher than 350 BPS higher on a subordinate lien. The borrower can only challenge the QM designation by proving that the mortgage didn’t qualify as a QM.
A QM-Rebuttable Presumption applies to higher priced loans and presumes that the lender complied with the Ability-to-Repay. But the borrower can rebut the presumption by proving that the lender knew when the loan was made that the borrower didn’t have enough residual income to meet living expenses.
Borrowers have three years from closing on the loan to file an action against a lender for not complying with the Ability-to-Repay rule. If the borrower is successful, the lender can be found liable to for up to three years of fees and finance charges, actual damages and legal expenses.
Borrowers who prove non-compliance with the rule can use that as a defense in foreclosure.
Morningstar said that classifying a loan as QM-Safe harbor, QM-Rebuttable Presumption, or non-QM will not affect the projected defaults.
However, the designations will impact projected severities.
“If a mortgage loan qualifies as QM-Safe Harbor, the ability of the borrower to challenge that the underwriting followed the ATR requirements is limited,” the ratings agency wrote. “For mortgage loans that are QM-Rebuttable Presumption and non-QM, the borrower’s ability to challenge the ATR can lead to longer foreclosure timelines and increased costs due to fees related to defending the challenge and the recoupment or offset that can result if the challenge is upheld.”
