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Residential Department: BackSpace: November 2014



Long-term gain trumps short-term pain

Was 2014 really the sea change in the residential mortgage lending world that many expected with the implementation this past January of the Dodd-Frank Wall Street Reform and Consumer

Protection Act’s ability-to-repay (ATR) and qualified mortgage (QM) provisions? Or was it something of an anticlimax in an industry that had already learned discipline and restraint the hard way when it fought to survive and pick up the pieces after the housing bubble burst?

When the Consumer Financial Protection Bureau’s (CFPB) final definitions of ATR and QM took effect this past Jan. 10, it was not as though mortgage professionals stopped on a dime on Jan. 9 and started conducting business entirely differently when they clicked on the office lights the next morning. Many had long since started applying tougher ability-to-repay and underwriting criteria long before legislation made such standards the rule.

For many brokers and lenders, the formal implementation of the ATR and QM rules was a virtual nonevent at their companies, since they had been following ability-to-repay and underwriting standards at least as stringent as those defined by the CFPB long before the new standards came into effect.

Every week, you hear about a few more lenders out there that are
testing the waters with non-QM products.

With most of this year in the books, evidence mounts that lenders, whether or not they started following the tighter standards before this past January, are taking the ATR and QM provisions to heart. Fannie Mae reported this past August that based on its survey of lenders in this past second-quarter, a large majority of respondents — 80 percent — indicated that they planned to limit themselves to QM loans only.

That doesn’t mean it’s been all smooth sailing in terms of business impact this year, but it appears that in general, the residential real estate industry has made the adjustment to the new Dodd-Frank standards fairly seamlessly, either through its own proactive efforts prior to the implementation of the guidelines, or compliance after the guidelines went into effect.

Caution defines non-QM lending

In this climate of tighter mortgage lending standards and a high degree of industry acceptance and compliance, what non-QM loans are being made as the first year of new ATR and QM winds down, and who is making them?

“From an industry perspective, there are two kinds of non-QM loans,” says Malcolm Hollensteiner, director of retail lending sales at TD Bank. “Traditional jumbo loans that fall outside of the QM definition, and interest-only mortgages for wealth management-type clients, with very stringent and conservative underwriting guidelines.

“The corollary is that for non-QM lending comparable to 2007 — kind of the Alt-A bucket — we have not seen much of a re-introduction,” he says. “We’re still seeing a very vanilla product set. But every week, you hear about a few more lenders out there that are testing the waters with non-QM products.”

For nonbank lenders, the opportunity to fill the gap with non-QM loans is generally being approached with restraint.

“We do strictly commercial and investment residential properties, and we always err on the side of caution, making sure the funds are strictly for business purpose,” says Johanna Traynor, senior loan officer at Lone Oak Fund LLC, the hard-money volume leader in Top Mortgage Lenders 2013. “Any time we’re in a grey area, we decline.”

Traynor says that Lone Oak gets a fair number of requests for owner-occupied non-QM residential loans, and knows some of the company’s competitors are advertising that they make these types of loans.

“Unless there’s a problem, there’s no problem,” says Traynor. “I’m sure someone out there is able to make these loans and kind of skirting the [compliance] issues, but whether or not that’s going to be a trend, I don’t know.”

Impact of consumer awareness

Perhaps the real sea change of the new provisions is the effect that media and industry coverage of the Dodd-Frank provisions has had on the very people the new regulations were intended to protect: prospective homebuyers.

The media attention paid to the ATR and QM provisions has likely helped many consumers contemplating a home purchase to better understand in advance what they’re getting into with a mortgage than they did in, say, 2007. This greater understanding of the process and terminology has the potential to have a long-term positive impact for the industry because of the business that comes from increased consumer confidence.

“A very high percentage of consumers are now aware of these definitions and terms, and what [they] mean to their ability to secure mortgage financing,” says Hollensteiner. “The impact, in terms of attention to the matter, has been significant.

“The whole QM and ATR definition [helps to] educate prospective homeowners that there still are incredible financing opportunities out there, and [dispels] some of the myths of the last few years that it’s harder to get a mortgage,” Hollensteiner says.

“The industry is working to educate the consumers to know that if [they have] saved money and taken care of [their] credit, there’s going to be plenty of opportunities available.” 


Kurt Stephan was editor of Scotsman Guide's Commercial Edition. For questions about this article, call (800) 297-6061 or e-mail

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