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QM, QRM to Have Huge Impact on Originations

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A new report indicates that just half of loans currently being originated would meet eligibility requirements of the Qualified Mortgage rule’s safe harbor, while the share drops even more when factoring in Qualified Residential Mortgage risk-retention requirements. Mortgages used to finance home purchases are more severely impacted than are refinances — suggesting an even bigger hit as refinances retreat.

As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Consumer Financial Protection Bureau announced last month said it adopted Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act.

The final rule, which goes into effect next year, is expected to protect consumers from irresponsible mortgage lending and shield them from risky lending programs.

But the rule is also expected to put a dent in residential loan originations, according to CoreLogic.

Agency loans will be exempted from QM for up to seven years, which CoreLogic says will limit the restrictions on credit this year.

“So the QM regulation is likely to influence only the small prime jumbo market and phase in more broadly as government-backed lending draws down over time,” CoreLogic said in its report, The Marketpulse.

CoreLogic called the currently high refinance share troubling for the long run because “serial refinancers” — highly qualified borrowers who accounted for much of the recent originations — are expected to account for a shrinking share of activity over the next two years as interest rates stop falling. As a result, mortgage production will decline over the next two years.

Although purchase financing activity is expected rise, the growth will be slow and come nowhere near replacing lost refinance business. In addition, borrowers who have refinanced into ultra-low rates will have less incentive to sell, move or refinance.

The increased reliance on purchase financing will “likely stimulate competitive pressure among lenders to squeeze profits and relax credit standards” in the short term.

With the implementation of Dodd-Frank rules, the loss of refinance activity will be exacerbated since only around half of current originations meet QM requirements, and the share is even more dismal when considering only purchase originations.

“We believe the issuance of final Dodd-Frank related regulations now underway represent a watershed moment that will impact the size of the mortgage market and performance for many years to come,” the report said.

CoreLogic performed an analysis that determined that only 52 percent of all originations will qualify for the QM rule’s safe harbor.

Around 24 percent of loans would be disqualified because of debt-to-income ratios in excess of 43 percent, while another 16 percent would be removed because of low- or no-documentation lending. Another 8 percent don’t meet the requirements as a result of negative amortizations and balloons, or terms of more than 30 years.

Considering the 10 percent downpayment requirements of the QRM, which is expected to be released by June, another 12 percent of originations are eliminated.

After factoring in both QM and QRM, only 40 percent of the market would be eligible.

The report indicated that while QM will have a similar impact on purchase and refinance originations, “the forthcoming QRM rule will have a proportionately larger negative impact on the purchase market than the overall market because of its downpayment requirement.” Although QRM is expected impact 13 percent of overall originations, 27 percent of purchase transactions will be impacted as a result of minimum 10 percent downpayments.

“The combined impact of QM and QRM is that only 25 percent of purchase originations would meet the eligibility requirements of the QM rule’s safe harbor,” CoreLogic said.

The jumbo lending market is expected to be less impacted than the overall market by the rules.

Rural states in the Midwest like South Dakota, Nebraska and North Dakota are expected to be least impacted by QM. But Nevada, Hawaii and Alaska — as well as boom-bust states like Arizona, California and Florida — are expected to be most impacted.

QRM, meanwhile, is expected to hurt lower-income states like Arkansas, while states with above-average incomes like Massachusetts will be least affected.

But the upside to the restrictions is that more than 90 percent of loan risk would be eliminated.

“Clearly, the rule will have an enormous positive impact on future performance,” CoreLogic stated.

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