Many lenders are concerned about the advent of
Qualified Mortgages (QM), with the federal government implementing standards
and compliances for mortgage loans. The concerns are for the potential
litigations rising in future due to, when and if, the borrowers default on
payments. But there are industry experts discussing opportunities which exist
beyond the barriers of QM. These opportunities are for lenders to make profits
and deal with mortgages having extremely low liabilities.
Identify the
borrowers with minimum risk potentials from the ‘unqualified’ mortgages
One of the data firms has mentioned in their
reports that around 60% of mortgages will not qualify as QMs. Within this percentage
of mortgages, there are loan programs which have the debt-to-income (DIT) ratio
exceeding 43%; completely unacceptable under QM norms. The mindset – all DTIs
surpassing 43% will be defective – with which the norm was drafted is wrong. In
this list of defective DTIs, there are borrowers who have excellent credit
history, have made 25% to 30% down payment for a house, can provide paperwork showing
their assets and income, and can also prove their employment under professional
occupations for a term of more than five to six years. With these kinds of
borrowers the loans are incredibly safe; ideal for non-QM programs.
What should
good non-QM programs carry?
A well-thought and well-structured non-QM program
will always have credit standards which brilliantly handle the concept of
compensation factors. The criteria should extensively lower the chances of
payment defaults and any other triggers/factors making the borrowers opt for legal
challenges. Also, the program should be encouraging buyers to go for at least a
20% down. The interest of the borrowers to make the down payment can be gauged
from their credit scores. The higher the score, higher are the chances of
borrowers willingly going for the expected downs. The programs can also benefit
if they are developed focusing on certain occupations, such as government
employees.
Keeping these ideas in mind, imagine what kind of
programs the credit unions can work on if they tap into their vast and exclusive
databases filled with customer information.
Amortization
and ‘interest-only’
How about pitching programs with features like
negative amortization and interest-only periods to high-income earning
consumers? To financially decent borrowers, these kind of flexible programs are
often quite appealing. Of course, risks with these programs are high. But one
of the precautionary measures while marketing such programs is to avoid doing
it on a big scale. The filtering and screening process for identifying the
right type of clients needs extreme supervision, which falters if the numbers
go drastically higher.
This could very well affect the availability of
mega (or jumbo) loans because they do not conform to the Fannie/Freddie loan
limits. This means that they will not be deemed qualified if the debt/income
ratio of the borrower exceeds 43%.
Every situation carries opportunities; sometimes
its windows are smaller and sometimes bigger. Same goes with the advent of QM. While
there are some fears, there is also some hope floating around. So give a
thought to these workarounds.
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