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.
“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.