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Non-QM Is Not The New Subprime

A new report indicates that residential lending to borrowers who don’t meet Qualified Mortgage rule requirements is not the same as pre-crisis subprime lending.

The Consumer Financial Protection Bureau’s QM designation doesn’t mean strong credit, so non-QM mortgages don’t always indicate bad credit or excessive risk.

Pre-crisis subprime programs often required little or no income documentation. But that’s not the case for non-QM loans, where underwriters thoroughly analyze the income.

Credit Ratings LLC discussed non-QM lending in Non-Qualified Mortgages are not the New Subprime.

The ratings agency said alternate documentation for self-employed borrowers does not necessarily present more risk on non-QM loans. It has seen more programs that use from 12 to 24 months’ bank statements to prove the ability to repay — though 24 months is preferred. Morningstar finds such use prudent for self-employed borrowers who have difficulty documenting income.

Non-QM loans with debt-to-income ratios in excess of 43 percent are typically offset by requiring credit scores in the mid- to upper-600 range, lower loan-to-value ratios and beefed up reserves.

“While some non-QM programs use alternative underwriting procedures, the programs document income and the borrower’s ability to repay, as opposed to the pre-crisis subprime loans,”
the report said.

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