Risk management concerns were responsible for a five-percentage-point reduction in bank non-qualified mortgage lending last year.

In 2016 non-QM lending by banks on average was 9% of their loans made, down from 14% in 2015, the American Bankers Association said.

Almost all of these loans have gone into bank portfolios since the housing crisis. While seeking to get a handle on the various kinds of risk associated with these loans, banks have elected to make non-QM loans at a slower pace, said ABA Executive Vice President Robert Davis in an interview.

During 2014, the first year the qualified mortgage rule was in effect, banks' average non-QM volume was 10% of their mortgage loans. In 2013, ABA estimated 16% of bank mortgage loans would have been non-QM if the rule had been in effect then.

Banks acclimated to lending under the QM rule in 2015 and so ABA anticipated that last year banks would have equaled or even exceeded the 2013 non-QM average, Davis said.

Instead, banks pulled back because of the unknown risk factors with non-QM loans, Davis found in discussions he had with attendees at ABA's Real Estate Lending Conference in Orlando on March 29-31.

There is default risk. Non-QM loans have yet to enter the peak default period of five to seven years after origination. They also have different litigation and regulatory risk from QM loans because of the safe harbor, Davis pointed out.

Underlying all of this is that banks are keeping these loans in their investment portfolio because there is a miniscule secondary market.

Over seven-in-10 of the banks participating in ABA's survey put their non-QM production into portfolio. And many had reached their risk tolerance level.

"So basically they filled the bucket up enough and there is a reduced appetite to add more because there is enough risk already," Davis said.

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