Is the private secondary market ready for the GSEs' non-QM loans?

Register now

The nonconforming market is ready to absorb most of the government-sponsored enterprise loans covered by the QM patch, but not all of them, according to a recent report.

The private market currently can handle 65%-70% of GSE loans that fall outside the qualified mortgage safe harbor from ability-to-repay liability, Redwood Trust estimates show. Fannie Mae and Freddie Mac have a temporary exemption from QM requirements. That exemption will expire in 2021 or when GSE conservatorship ends.

An estimated $185 billion in loans purchased by the GSEs, or 25%-30% of the mortgages they buy, would be non-QM loans if the patch were not in place, according to Redwood's estimates, which are based on GSE credit-risk transfer data.

"That could really lead to a lot more non-QM volume," Mark Tecoktzky, partner at Ellington Financial, said during the Keefe, Bruyette & Woods Real Estate Finance and Asset Management Conference Thursday, where the QM patch estimates were discussed.

The non-QM market has more capacity these days because it is a lot more scalable and standardized than it used to be, Steven Ujvary, senior vice president at Starwood Capital Group, noted during the conference.

"Everyone kind of has the same programs and the same pricing," he said.

And technological developments aimed at improving data integrity are helping lenders and investors keep credit risk under control, according to Lauren Hedvat, managing director at Angel Oak Capital.

"For example with bank statement loans, the bank statements will be provided in many cases directly from the borrower's banking institution, so there is less room for any manipulation by the borrower," she said.

For reprint and licensing requests for this article, click here.
Secondary market Nonconforming loans ATR Qualified Mortgages GSE reform GSEs Underwriting Redwood Trust Fannie Mae Freddie Mac