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.