Borrowers will be able raise QM defenses in foreclosure or “threaten litigation to negotiate a loan modification,” S&P says in a new report on the QM ability to repay rule.
The new standard may “increase losses, extend foreclosure timelines and lead servicers to pursue foreclosures less frequently in favor of loan modifications, deed-in-lieu or short sales,” the Nov. 26 report says.
The S&P report also points out that the QM rule requires full documentation of all loans and this one “change alone significantly reduces default risk.”
The QM rule allows borrowers to pursue damages for violations of the ability to repay standards.
In cases of an early default during the first year, a borrower can pursue a claim to stop a foreclosure. However, S&P notes that a successful case entitles the borrower to special damages equal to the interest paid during the first year. “Thus early defaults will cause lower assignee liability losses,” S&P says.
In addition, the number of on-time payments made by the borrower is considered evidence that the originator properly underwrote the loan based on the borrower’s ability to make the payments. “While the QM rule does not specify the length of time necessary to show this, and the borrower can use defensive claims for the loan’s life, we believe that successful claims later in the default curve should be less likely,” S&P says.
The QM rule is slated to go into effect Jan. 10, 2014.