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Lenders Begin to Think Outside the QM Box

November 17, 2014

Message from Joe Rossi:

"While not limited to the issues affecting QM, our clients at TBAS have dedicated a great deal of effort and investment to preparing organizations to accommodate new industry standards and regulatory changes. As you can see from the adjacent article, these accommodations may still require businesses to remain flexible and ready to respond further as the full effect of the change is fully appreciated. As interviews with practitioners confirm, understanding how the loan processing infrastructure, both technology and operations, will change is an evolving process."

In June, Fannie Mae surveyed lenders on whether or not they planned to pursue non-Qualified Mortgage (QM) loans, the loans that do not meet Fannie Mae and Freddie Mac's underwriting requirements under the new rules that took effect this year. The results of Fannie Mae's survey of lender sentiment on this issue were mixed.

While 19 percent of respondents said they did plan to pursue non-QM loans, 34 said they planned to stay away from them. The most popular answer, however, given by nearly half of the lenders who responded to the survey (46 percent) was that they planned to “wait and see.”

When Fannie Mae conducted its survey in late May and early June, lenders had been living with the QM rules, which took effect in January, for less than six months. Increasingly market observers say lenders' hesitance, and their wait-and-see approach, is an early precaution that will likely diminish over time.

“As they get more comfortable with what goes into QM calculations, and with how it fits into their overall business strategy, you will see further evolution of lending,” said Joseph Pigg, senior vice president in mortgage finance at the American Bankers Association. “Obviously, at the outset if you are being very cautious, you are only going to want to make QM loans because they carry the least liability. As lenders get more comfortable around the edges, I think they may be willing to take more added risk, especially if they know they have well-documented their borrowers, and that a borrower fits well with an ability to repay even it's not a QM loan.”

Vendors who provide the loan origination systems that help lenders manage and execute their loan origination business strategies are well aware of that potential evolution of lending, and it presents them with an ironic situation. On one hand, qualified mortgage rules eliminate the gray areas in mortgage lending and make mortgage originations more black and white. On the other hand, vendors had to build in flexibility to allow lenders to modify their strategies.

“With QM there is no middle ground. You are either doing QM loans only, or you are doing non-QM loans and you are doing both,” said Mark Deese, product manager for loan origination systems at Fiserv Lending Solutions. “Most of our clients are either definitely only QM or they are non-QM also, but we have to give clients the flexibility so that if they make a change, they don't have to modify their systems drastically. We want to give them control of how they want to operate.”

Then there is the additional issue that a loan that meet the QM criteria initially could, as time passes, no longer fit into that category. “What happens if a loan falls out of QM? Is it a hard stop? A soft stop? Or should the system just warn you so that you can make changes yourself. We give clients several options of how to handle a loan when it falls out of that category,” Deese says.

In some cases a client who works with non-QM loans may want to modify a loan that falls out of the QM criteria into a non-QM portfolio type loan. Other times clients will want a hard stop, Deese says. Often lenders set specific permissions on who within the firm can make decisions on loans once they fall out of the QM category.

While the criteria for defining QM loans are built deep into loan origination systems, Deese says the flexibility to modify QM/non-QM strategies and the user interfaces for handling loans that fall out of the QM criteria are the most visible changes for users that the QM rule has brought to loan origination systems.

“Before it wasn't really a concern. If you qualified for a loan then you qualified for it. You didn't really have to worry about some of the parameters that the loan was adhering to, you could do a more freeform portfolio-style loan,” he says. “Now there's a new user interface, and there are different calculations that were added. It's a whole new way of processing a loan.”

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