For a long time, the least favorite acronym in mortgage banking was QM. However, the Qualified Mortgage is part of the daily bump and grind – and the industry has learned to live with it. To talk about QM, we called on Joe D’Urso, president and chief operating officer at Shelton, Conn.-based Clayton Holdings.
Q: In the run-up to the launch of the QM standards, there were many dire predictions of problems related to credit availability. Now that QM is a reality, did those dire predictions ever come true? If not, why not?
Joe D’Urso: It’s difficult to measure the impact that QM has had on credit availability because, frankly, credit availability was fairly tight even in the months leading up to its implementation. What QM did do, though, was to cause the industry to take a temporary step back. The industry did a good job preparing for the rule, but that meant investing in training for employees and pulling them off the production floor. In a post-QM world, underwriting or loan reviews are now taking longer, though not dramatically so.
Lately, we’ve heard that a number of lenders have been announcing that they will be making non-QM loans, mainly jumbos. Some lenders, like Wells and Carrington, have indicated that they will be lending down the credit curve. As volumes and margins continue to be squeezed, I wouldn’t be surprised to see more lenders expanding their credit boxes.
So far, the big banks and investors have been reluctant to purchase all but the most pristine jumbos loans. Over time, their appetites may expand to include non-QM and even non-prime, but that probably won’t happen until they have a better idea of how regulators will view these products.
In my opinion, caution on credit availability is more symptomatic of the market as a whole rather than the specific result of QM.
Q: Do you believe that the QM standards will receive more tweaking and/or updating in the coming year?
Joe D’Urso: Definitely. Although the CFPB has provided informal guidance to industry participants, including the MBA, a lot of players will be sitting on the sidelines until the guidance is incorporated into rules or official commentary. We expect the CFPB to issue additional proposed amendments to clarify specific areas relating to points and fees, inclusions / exclusions, as well as address “cure” provision opportunities for inadvertent errors or omissions. It’s hard to imagine that there won’t be some way of rectifying a loan that’s classified as non-QM for transposing a couple of numbers in an HOA fee.
Additionally, this year we expect to see the long-awaited final QRM rule, which will only serve to give the market more clarity and allow it to move forward on the securitization front.
Q: What do you see as the most pressing aspects of QM-related compliance?
Joe D’Urso: More paperwork, more documentation and more proof of compliance. The required documentation within each loan file is growing. In addition to the core documents that the lender used to render its credit and compliance decisions, the large aggregators and rating agencies are requesting the loan file contain detailed ATR/QM analysis worksheets.
Future owners or servicers of the loan will need this detail to prepare a defense to potential borrower litigation. The worksheet(s) document the income and debts that were included and excluded as part of the lender’s evaluation of the borrower’s ability to repay the loan.
Some aggregators are also requiring worksheets to show how the residual income evaluation, as well as the points and fees analysis, were done at the time of origination. Several of the rating agencies have published their guidance requiring lenders/sellers to provide their ATR/QM status for verification by the independent third-party reviewer performing the due diligence.
Q: Have you seen more compliance experts being hired as a result of the demands created by QM and other regulatory changes?
Joe D’Urso: The industry has definitely seen a renewed focus not only on hiring but retaining top regulatory experts. In our own business, we’ve seen not only an uptick in compliance projects, we’ve also increased our spend with external law firms to make sure that Clayton is always at the forefront of any and all regulatory compliance issues. At Clayton, we’ve been practicing what we preach by expanding our compliance department to include a new VP of Regulatory Compliance.
Clayton Holdings is online at www.clayton.com.