Qualified Mortgages: How to Make Riskier Mortgages, the New Old-Fashioned Way – Nom de Plumber’s Thought of the Day

ndp  Nom de Plumber is a Nom de Plume


With the no-sunset litigation risk of non-Qualified Mortgages, lenders will unlikely originate them, greatly favoring Qualified Mortgages.
Given the 43%-DTI test, an originator might prefer offering an 80%-LTV mortgage to an employed person with modest but stable wages and meager net assets, rather than a 50%-LTV mortgage to a self-employed, contract-work, or retired person with unsteady or no wages yet substantial assets.   Why?  The second mortgage, deemed non-QM, poses open-ended exposure to predatory-lending allegations.

The New Normal underwriting process oddly downplays economic credit-risk factors, focusing originators away from asset-supported loan coverage, toward political and litigation tail risk avoidance.   That means credit-riskier mortgages, screened via an elevated, Bubble-era DTI threshold rather than prudent, pre-Bubble LTV limits.  

Akin to the 2006-2007 nadir of subprime consumer lending, QM Ability-to-Repay focuses on income-affordable payment burden, instead of the best default prevention……borrower skin-in-the-game, in the form of meaningful equity (LTV cushion).   

Unexpected borrower under-employment or home depreciation can easily tip over this CFPB-compliant but one-legged barstool, leading a Qualified Mortgage borrower to default.
Outcome:  Since a high-LTV, low-DTI mortgage may be more prone to default loss than a low-LTV, high-DTI one, the new QM rule may inadvertently foster riskier lending.  Indeed, the GSE’s will buy such mortgages despite incremental default losses, being deemed Qualified.

Thank you.

About these ads

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s