By Gretchen Wegrich
If exemptions were removed for government-sponsored loans, approximately half of today's mortgage originations would not qualify under the 'Qualified Mortgage' rule, reported CoreLogic in a February MarketPulse Report.
The report focused on the effect of the qualified mortgage rule and related legislation, including the residential mortgage provision sketched out by the Dodd-Frank Act, which is not set to take effect until January 2014.
Under the proposed legislation, the definition of a qualified mortgage is a mortgage loan that does not contain excessive upfront points and fees or toxic loan features (such as an interest-only loan, negative-amortization loan, a term beyond 30 years or a balloon loan). The qualified mortgage definition also states that borrowers' debt-to-income ratio must be below 43 percent. The rule also includes a provision protecting responsible lenders against borrower lawsuits.
Undeer the new qualified mortgage guidelines, CoreLogic found that approximately half of the current mortgage market would not meet the new requirements for a safe loan.
The Qualified Mortgage rule's debt-to-income ratio, set at a maximum of 43 percent, would oust about 24 percent of all mortgage originations. Added together with the impact of all qualified mortgage regulations, approximately 48 percent of today's qualified mortgage originations would be ineligible under qualified mortgage rules without the GSE exemptions.
GSE exemptions amount to a whopping 90 percent of all mortgage originations, noted CoreLogic. Therefore, the real impact of the qualified mortgage rule is minimal, since the Federal Housing Administration and housing agency-backed loans represent 9/10 of all mortgage originations.
Once the qualified mortgage rule is combines with related rules, including the risk-retention and qualified-residential mortgage rules, the regulations will cut out 60 percent of mortgage market.
The effect, notes CoreLogic, is to leave "just 40 percent of the market QM- and QRM - eligible without a GSE exception."
But there are foreseen positives for the mortgage marketplace as well.
"The Qualified Mortgage rule was implemented to minimize risk layering, which magnifies risk in unexpected ways," wrote CoreLogic senior economist Sam Khater.
He added, "While QM and QRM remove 60 percent of loans, they remove more than 90 percent of the risk space, the DTI rule removes 35 percent of all serious delinquencies (SDQs), followed by loans with credit score of less than 640 (28 percent of SDQs) and the 10 percent down payment (18 percent of SDQs)."
The jumbo mortgage loan market represents 10 percent of all mortgage finance transactions yet lacks the government exemptions available in the conforming mortgage market. Therefore, the qualified mortgage rule is expected to upend the jumbo mortgage market in early 2014, although the impact may not be as severe. CoreLogic found that more than 62 percent of today's jumbo mortgage originations would meet qualified mortgage requirements.
"Similar to the overall market, DTI and low or no documentation combined have the largest impact, accounting for 30 percent of the jumbo market," Khater said. "Since down payment requirements are much higher for jumbo loans than conforming loans, the impact of minimum down payment requirement (QRM) is smaller for jumbo loans than for conforming loans."
On a state by state basis, the qualified mortgage rule may have an even greater impact. In Nevada, just 42 percent of originations meet the safe harbor provisions of a qualified mortgage. In Hawaii, only 43 percent of current loans qualify. In Alaska, only 44 of current originations meet qualified mortgage requirements.
In the near future, concluded the report, the role of the qualified mortgage rule will be small and will serve as reinforcement of the GSEs. Jumbo loans will be moderately impacted.
In the long term, about half of all originations that are easily approved today will be affected by the rules, CoreLogic predicted.
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