WE’RE HEARING that the few lenders willing to originate non-qualified mortgage loans are banks that can hold the loans in portfolio and satisfy their needs of their affluent customers. The rest of the business may be overly worried about litigation costs, though, since these could prove to be 10 basis points or lower.
Of course, this will not be a hardship for these banks because many have been ready originators and buyers of jumbo loans this year.
The folks at the Consumer Financial Protection Bureau are well aware non-QM loans are generally perceived to be dangerous creatures—because of the potential litigation risk. And most lenders will be very careful to stay within the QM parameters so they will be shielded from litigation.
That is why the bureau assigned Fannie Mae- and Freddie Mac-eligible loans qualified mortgage status. They didn't want the origination of conventional loans to come to a halt on Jan. 10 when the QM rule goes into effect.
It seems perfectly logical for lenders to be cautious since the industry has been deluged with lawsuits and loan repurchase demands for the past few years.
But lending standards are so tight these days and most of the exotic and dangerous loan products that caused so many problems are no longer available.
Meanwhile, CFPB officials have analyzed the possible litigation cost of originating non-QM loans. And they estimate it would be minimal.
“We have a hard time seeing it being any more than 10 basis points per loan,” says Peter Carroll, who is in charge of CFPB's Office of Mortgage Markets.
“Ten basis points would be the outer boundary,” he stressed, and it could be as low as 3 bps. He spoke at a Women in Housing and Finance event.
The analysis is based on a 3% default rate. The analysts estimated what portion of the troubled borrowers would file a complaint, how many would be able to attain legal counsel and the likelihood of those borrowers prevailing in court.
But lenders are not focused on the pricing of litigation risk. They are focused on the cost of one successful challenge and the damage to their reputation.
Under the Dodd-Frank Act, a bank could end up paying three years of interest payments and finance changes if the plaintiff's attorney can show the lender did not properly evaluate the borrower's ability to repay the loan. In addition, the bank would have to pay $4,000 in statutory damages and the borrower's attorney fees.
CFPB officials expect the market for non-QM loans will develop as lenders become more comfortable with the new QM lending regime and they gain the confident to take on more risk. But that may take several years.
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Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.