Non-Qualified Loan

Regulations Result to Lower Non-QM Originations

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Regulations Result to Lower Non-QM Originations

Per an American Bankers’ Association’s Real Estate Lending Survey released recently, tight regulations have never been helpful in serving the business objectives of bankers. A good 95 percent of bankers say current regulations are basically hindering credit availability towards consumers. They highlight the toll in cost that they needed to integrate into their processes for compliance. The report was released during the association’s annual Real Estate Lending Conference in Orlando, Florida.

Report highlights

Among the highlights of the report include the fewer non-qualified mortgage originations in 2016. In total, they have originated 5 percent less in non-qualified mortgages last year. In 2015, non-qualified mortgages made up 14 percent of all mortgage originations but decreased to only 9 percent in 2016. Over 30 percent of these bankers stopped originating non-QM loans due to the stricter regulations.

ABA EVP Bob Davis says “Non-QM loans have been subject to heightened regulatory requirements and risk, reducing the willingness of banks to extend these loans to even the most creditworthy borrowers. Despite ongoing regulatory hurdles, community banks remain resilient in their ability to manage risk levels, increase productivity and introduce more first-time homebuyers into the market.”

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Record-breaking numbers

The survey yielded some surprising numbers, aside from the highlighted non-QM decline. In its 24 years of establishment, first-time homebuyers mortgage lending on single-family abodes hit the highest. Last year’s record was a 16 percent rise from the previous year’s.

Foreclosures fell as well. In 2015, foreclosures were at 0.63 percent. This year, it decreased to just 0.37 percent.

Meanwhile, delinquencies on single-family home loans increased to 1.42 percent from 1.27 percent in 2015.

It also appears that consumers still bank on stability by the number of fixed-rate mortgage originations which remains the most popular loan type, according to the survey.

Aside from the tightened regulations, other concerns among realtor circles include the rising interest rates, continued scarcity in available housing, and the increasing cost of operation.

The survey was participated by 159 banks, 76 percent of which with less than a billion dollars in assets.

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2016 Share of Non-QM Loans Return to 2014 Level

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2016 Share of Non-QM Loans Return to 2014 Level

Against the backdrop of regulatory control, lenders made fewer non-qualified mortgages or non-QM loans in 2016. This is according to the latest real estate lending survey conducted by the American Bankers Association (ABA) among 159 participating lenders, made of commercial and savings banks.

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Regulations Take a Toll on Non-QM Loans, Lenders

The respondents cited increased regulations or regulatory burden in the mortgage market as their top concern.

The percentage of non-QMs in the total mortgage production dropped to 9% in 2016 from 14% in 2015. Last year’s figure was on the same level as 2014’s 10% around the time when the ability-to-repay rule and QM guidelines were first introduced by the CFPB.

The regulatory impact on lending non-QM loans can be seen by an increasing number of banks restricting themselves to making QM loans (31% in 2016 compared to 26% in 2015). Also, banks who primarily originate QM loans then make non-QM loans for a targeted market decreased, from 54% in 2015 to 45% in 2016.

ABA Executive Vice President Bob Davis observed in the trade group’s official journal, “Non-QM loans have been subject to heightened regulatory requirements and risk, reducing the willingness of banks to extend these loans to even the most creditworthy borrowers.

Sixty-one percent of the participating banks expect the ATR/QM rules to have a moderate effect on credit availability, while 29% believed the impact to be negligible and 10% rated the impact as severe.

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“Despite ongoing regulatory hurdles, community banks remain resilient in their ability to manage risk levels, increase productivity and introduce more first-time homebuyers into the market,” Mr. Davis pointed out.

In fact, more single-family mortgages were originated for first-time homebuyers in 2016. The percentage increased from 15% in 2015 to 16% in 2016, a record for the survey concerned.

What Makes Non-QM Loans?

The loans’ debt-to-income ratio was the main reason cited by banks why non-QM loans failed to pass the QM standards in 2016.

Other reasons cited were documentation requirements that prevented consideration of all income and assets, interest rate spread exceeded the available spread over the average prime rate, balloon payment, interest-only payment, and excessive points and fees.

A vast majority of banks who chose to originate non-QM loans kept these loans in their portfolio while a few sold them to investors directly or in the secondary market.

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