The next mortgage chapter of the Dodd-Frank law becomes real on Jan. 10, 2014, the effective date of the qualified mortgage rule, one of the more significant regulatory changes that the mortgage industry has encountered.
Making only QM loans provides lenders with a safe harbor: by lending within the guidelines, borrowers likely have no recourse. This is housing finance as no lender currently knows it. A long accepted risk in mortgage lending has been that borrowers may pursue action against their lenders at some future time. The QM rule changes that, providing protections previously unavailable.
Choosing to make only qualified mortgages after Jan. 10 is the less risky path. But it may also prove to be the road which limits opportunity, and, therefore, lending volume.
Mortgage lending volume is expected to decline by roughly one-third in 2014 - from approximately 8.8 million units in 2013 to 5.7 million.
While over-arching assumptions are exactly that, they do make the math easy. Thus, if the market declines 30%, let’s assume that every lender’s volume will decline by a like amount. (This is before the QM rule is considered.)
Industry estimates based on 2013 lending patterns reveal that 25% to 60% of loans today fit the non-QM definition. Using the lower end of that range, and assuming lenders make only qualified mortgages, lender volume could decline 55% in 2014.
Most lenders would have significant difficulty functioning at less than half of previous volume.
From this perspective, making non-QM loans becomes a strategic consideration. Do the rewards outweigh the potential risks? In some sense, the risks are no greater on the effective date than they are today, considering that consumers financing a home today have potential rights of recourse against their lenders.
The QM rule, in this light, gives rather than takes; the risk has always been there, although it becomes limited where qualified mortgages are concerned.
Recourse risk is one consideration when making the non-QM decision. Balance sheet capacity is another. The GSEs cannot purchase non-QM loans. Since the GSEs have been the predominant mortgage buyer since 2008, this presents a potential challenge. Lenders that engage in non-QM lending must either have balance sheet capacity for this new class of loans or a buyer waiting in the wings.
How the mortgage market actually metamorphoses after January 10, 2014 is uncertain—though there will be hints, perhaps strong ones, by the time the snow melts in early spring.
Clearly firms that have invested in customer analytics to know their borrowers will have the greatest confidence in deciding whether or not to originate non-QM compliant loans.
Terry Moore is senior managing director and global head of Accenture Credit Services