New rule will likely expand funding options for non-QM borrowers
A recent report from S&P Global predicts that non-QM lending will bounce back to pre-pandemic levels this year, thanks to record-low mortgage rates that continue to fuel Americans’ appetite for homes.
“The non-QM sector experienced the biggest shock in the spring of 2020 as originations and securitizations largely halted, and non-QM issuance fell relative to 2019,” S&P Global wrote in the report. “However, we feel that non-QM issuance volumes will return to 2019 levels this year, reaching an estimated $25 billion, due to a strong purchase loan market and slowing agency refinancing activity. We also think that older non-QM securitization clean-up calls could contribute to additional new securitization collateral in the low-interest-rate environment.”
S&P said that the Consumer Financial Protection Bureau’s issuance of the final QM rule – which amends the general qualified mortgage definition – could lead to an expansion of private mortgage credit.
Read more: CFPB completes overhaul of two QM loan rules
The new rule adopts a “price-based” limit to replace the 43% debt-to-income (DTI) ratio requirement for general QM loans. This strategy, according to CFPB, is more holistic since a loan’s price is “a more flexible measure of a consumer’s ability to repay than DTI alone.”
“Mortgages currently labeled as non-QM due to the DTI ratio cap would potentially qualify for lender protections under the amended definition,” according to the report.
S&P explained that the reduced liability for lenders and subsequent assignees could reduce financing costs and expand funding options for non-QM borrowers.
“Elimination of the DTI ratio threshold addresses the concern that the expiration of the GSE patch could result in reduced mortgage credit availability because the GSEs lend to qualifying borrowers with DTI ratios as high as 50%, and some of these loans with DTI ratios over 43% may have APRs below the APOR +225 bps threshold. These loans would retain QM status upon a transition of Fannie Mae and Freddie Mac to the new general QM definition,” the company said.
In addition to the new rule’s impact, S&P Global anticipates that the increased use and adoption of technology to automate mortgage appraisals and underwriting would make the origination process more efficient and cost-effective in 2021.