Securitizing residential mortgages originated outside of the ability-to-repay/qualified mortgage rule’s parameters could get tougher under a Fitch Rating proposal.
Mortgage-backed securities containing “higher-priced QM and non-QM loans face litigation risk and will require additional protections” against “higher loss severity assumptions,” said Fitch managing director Roelof Slump in a report.
Higher loss severity assumptions set the bar higher for the amount of credit enhancement Fitch would require issuers to provide to investors to get top ratings on their deals. Better ratings make bonds more marketable, but higher CE levels add to issuance costs.
Fitch’s proposal has a Dec. 9 comment deadline and includes several other hurdles to higher ratings affecting loans originated outside the rule’s most conservative boundaries.
The QM/ATR rule goes into effect for mortgages originator on or after Jan. 10, 2014. It gives lenders some protection from litigation risk if they make residential mortgages within guidelines designed to ensure lenders have correctly sized up borrowers’ ability to repay their loans.
Market participants debate to what extent the rule will discourage issuance of non-QM loans.
Loans originated outside conservative QM strictures could be particularly important to the struggling private-label residential MBS market. The private-label market by definition exists outside of traditional loan guidelines such as those set by government-related entities or the QM rule. Originations have been in shorter supply in the larger mortgage market of late, and issuers in the private-label market face even more competition for product.
