Just When We Got the Hang of It, QM Might Be Changing
By John I. Vong, CMB, CMT
August 7, 2018
John Vong, CMB, CMT, is president and co-founder of ComplianceEase, Burlingame, Calif., and a frequent contributor to MBA Insights. He can be reached at firstname.lastname@example.org.
It took the better part of four years, but our industry seems to have finally come to grips with the Qualified Mortgage rule and, more recently, what it takes to originate and securitize non-QM loans. But, as they said in a certain summer blockbuster movie, "just when you thought it was safe to go back in the water," the Bureau of Consumer Financial Protection may be considering "making waves" about QM.
Recently, STRATMOR Group surveyed 120 lenders on the subject of QM and Ability to Repay and attempted to quantify how much ATR/QM has increased compliance costs and who is paying for them. On average, lenders estimated that these rules have added approximately $139 to the cost of origination, with lenders absorbing roughly $95 of these costs and passing the remaining $44 onto borrowers at closing.
The majority of respondents said they were in favor of preserving the status quo. "Sixty-two percent of respondents favored little or no change to ATR regulations," the report said. "For QM regulations, 54 percent favored little or no change." This was true for both banks and mortgage companies and lenders of all sizes, according to STRATMOR.
STRATMOR's conclusion: "It's understandable that more lenders than not don't want to see changes to the ATR/QM rules. Just when they've figured out how to comply with the rules, ‘change' is in the air. Unfortunately, even elimination of the regulations will likely require costly changes in the processes, systems and training, and lenders will have to spend more time and more money to undo what is in place."
As required by the Dodd-Frank Act, the Bureau reached out to the lending community last summer to solicit comments on how to improve the rules that govern QM and the ATR requirement. Of the nearly 500 comments received, most suggested tweaks or adjustments to the current rules, rather than total elimination, according to Laurence Platt, a partner with Mayer Brown who specializes in mortgage regulation. Typical of the suggestions: raise the debt-to-income ceiling (currently at 44 percent), change documentation requirements or three percent cost cap.
When the QM rule was first proposed, its drafters acknowledged that there were a significant number of borrowers who would fall outside of the QM box and that this would lead to a robust non-QM market. Which didn't happen, at least for the first few years. But that's changing. Nomura recently estimated that non-QM originations doubled from 2016 to 2017, reaching approximately $7 to $9 billion last year. Private label securitizations of non-QM loans, less than $370 million in 2015, had increased ten-fold by the end of last year and are on track to more than double again this year. Nomura is now estimating that non-QM originations could top $100 billion within 10 years. This projection, of course, could change should the QM rule be either loosened or tightened in the coming months and years.
More Changes to Come?
The current Administration has signaled that it's not a fan of QM. At the end of May, President Trump signed a new law that amends the Dodd-Frank Act and gives regulatory relief to smaller depository institutions. One of the provisions relaxes ATR requirements for banks and credit unions with assets below $10 billion and, in effect, gives them automatic QM/safe harbor protection for loans that they hold on their balance sheet.
Bureau Acting Director Mick Mulvaney is on record saying he believes there should be different rules for different size and kinds of lenders. "There's a difference between the mortgage that goes out on Quicken or Rocket Mortgage, and the one that my local credit union does for somebody that they've known for three generations," Mulvaney said recently at a National Association of Realtors conference.
"You're going to see us try to bring some sanity to the largest market, including QM," Mulvaney promised. "If you think you can have a one-sized-fits-all rule for every single mortgage, you don't understand the mortgage business."
In mid-June, the Administration nominated Kathy Kraninger, who has worked with Mulvaney at the Office of Management and Budget, to be Director of the Bureau. While her views on QM are not known, she is expected to follow her predecessor's less-is-more approach to regulation in general.
Meanwhile, the clock is running out for the "GSE patch," which designates QM status to loans backed by the GSEs. Morrison & Foerster LLP partner Donald Lampe points out that the industry is about halfway to this important deadline, which is set to expire in 2020, and significant lead time is needed if this part of the rule is not extended. He said recently, "When BFCP promulgated the rule, 2020 seemed like a long way off. Now, any discussion of changing the QM rule necessarily must include the fate of the GSE patch."
In addition, the Administration is circulating a new plan to restructure the GSEs and revise their mission. The plan would end their conservatorship, and with it eliminate the GSE patch that has made the QM rule largely a non-issue for lenders selling to Fannie Mae and Freddie Mac.
While it is too soon to tell how serious the Bureau and the Administration are about changes to QM or how quickly they could come to pass, the mortgage industry needs to be ready to change tack if the regulatory winds and seas change.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)