Non-QM loans bend underwriting less than subprime did: DBRS

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Securitized loans originated outside the Qualified-Mortgage rule's parameters have looser guidelines than mainstream loans do today, but are more tightly underwritten than past subprime or alternative-A products, according to DBRS.

"Given the frequently weaker credit profiles of non-QM borrowers, some market participants have equated them to precrisis alt-A, or subprime, mortgages. However, DBRS deems the credit quality of non-QM securitizations issued to date to be considerably improved from precrisis standards," DBRS Managing Directors Quincy Tang and Kathleen Tillwitz and Senior Vice President Thomas Crowe said in a report the ratings agency published Monday.

Among other things, non-QM products generally require more income documentation than mortgages like the "no-income, no-asset loan" originated during the housing bubble.

Wage earners must, for example, usually provide at least one or two years of W-2 tax forms plus their most recent paystub, according to a sample of three lenders' underwriting guidelines DBRS analyzed. Self-employed borrowers must provide at least one or two years of personal and business tax returns, or at least 24 months of personal or business tax statements. Asset verification requires at least one monthly bank statement. There must be a minimum of three to six months of reserves.

In addition, non-QM or nonprime mortgage underwriting has had tighter credit score and loan-to-value limits than in the past.

Weighted average credit scores were rarely any lower than 690 and weighted average LTVs were generally between 75% and 80% in the mortgage pools the analysts examined. In comparison, a representative precrisis pool the analysts looked at had a weighted average score of 620 and weighted average LTV of 90%.

"If the economic environment becomes more distressed, some of the non-QM borrowers, particularly those with a history of credit events, may come under pressure, although DBRS generally believes that the rated non-QM securitizations are sufficiently credit enhanced to withstand expected losses at various stress levels," the analysts said in the report.

Alt-A credit and subprime residential mortgage backed-securities issued precrisis had a high incidence of fraud and experienced widespread underperformance when the housing bubble burst. Subprime loans typically had lower credit scores while alt-A loans typically made exceptions for other types of underwriting criteria.

Post-crisis, lenders in the private market have had to be able to prove the loan meets ability to repay standards. If they make a loan outside the QM definition, they must do it without a safe harbor from liability.

Non-QM mortgage securitizations also are subject to 5% risk retention requirements because they fall outside the Qualified Residential Mortgage definition that would otherwise give them an exemption.

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Qualified residential mortgages Qualified Mortgages ATR RMBS Underwriting Subprime lending DBRS Morningstar