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

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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.

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