Mortgages that do need meet new ability-to-repay rules are likely to be securitized only sporadically, according to participants at the ABS East conference.
Panelists at a session late Tuesday agreed that sponsors are likely to follow the example of Redwood Trust, which included just two such loans in its latest deal, Sequoia Mortgage Trust 2014-3. And those two loans came close to meeting the criteria for qualified mortgages, which fall under a safe harbor from liability under the affordability rules.
"The non-QM product that we see is still at the higher end of the credit spectrum, but falls outside of the standards, such as IO loans or self-employed borrowers," said Chris Haspel, Partner and head of Capital Markets at Fenway Summer and a panelist at the conference.
In order for a loan to be considered a qualified mortgage, it can have a term no longer than 30 years, and it cannot have high-risk features such as negative amortization, interest-only periods or balloon payments; also points and fees must not exceed 3% of the loan amount for loans greater than $100,000; and the borrowers' total debt cannot exceed 43% of income.
The loans that Redwood securitized were originated to borrowers with substantial equity in their properties (the loans have LTVs of 65% and 62.5%) and strong credit (a weighted average score of 776); however the borrowers' total debt exceeded 43% of their income.
Sharif Mahdavian, a managing director at Standard & Poor’s, said there is nothing that would stop the agency from rating a portfolio comprised entirely of non-QM loans. “People make the assumption that non-QM is a nonprime loan,” he said. But Sharif said there may be cases where the loans are very high credit, but do not meet the QM DTI requirement, echoing Haspel’s remarks.
Caution isn't the only thing preventing sponsors from securitizing more non-QM loans. There aren't that many non-QM loans being originated.
In a survey conducted by Fannie Mae between May 28 and June 8, nearly six months after ability-to-repay rules took effect, only 20% of 174 lenders planned to do any non-QM lending; 80% planned to either not originate non-QM loans or take a "wait and see" approach.
Those lenders willing to originate non-QM loans are targeting only super prime borrowers, those that are very high in credit. This includes borrowers who are self-employed, who may have trouble providing the full documentation required under QM, or may have high debt-to-income levels. These lenders are willing to offer the kind if interest only loans included in the Redwood pool.
A report published by Bank of America Merrill in August cites three lenders: Impac Mortgage announced this summer several non-QM products under its "AltQM" program. The loans aim to meet the needs of "the self-employed, foreign nationals or real estate investors with multiple properties," according to the lender's website. The various products include options with varied LTV ratios, proof of income means and interest only payments.
Another lender, RPM Mortgage, also introduced non-QM products in August. The products are directed at self-employed and retired borrowers. The lender looks for those borrowers with "considerable equity, assets and credit" but with limited proof of income.
Home Buyer Power is a non-QM program offered by New Penn Financial that targets borrowers with high incomes as well as those with high income potential that seek interest-only options or DTI ratios up to 55%.