While the non-QM loan market is still very new and ostensibly untested, it appears that the loans originated thus far are holding up pretty well.
A new report from Fitch Ratings revealed that borrower claims have been “nonexistent” since the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rule was implemented in early 2014.
Of course, the data should be taken with a grain of salt because most home loans these days meet the QM definition, or are exempted thanks to the temporary QM status linked to loans backed by Fannie Mae, Freddie Mac, and government agencies like FHA, VA, and USDA.
That doesn’t leave too many loans left to be considered non-QM, but it’s still a relief that the nascent industry hasn’t derailed early on.
Loans that meet the QM definition receive safe harbor from the ATR rule, so lenders are more likely to originate them to avoid any undue liability.
And of the 10,000+ loans included in Fitch-rated newly originated mortgage pools since the rule went live, just 14 have been classified as “non-QM,” making them susceptible to potential ATR claims.
Of all those loans, only three are more than 60 days delinquent and none of them are non-QM loans. Granted with only 14 in the bunch, the odds were low it would be one of them.
Fitch noted that a combination of more stringent underwriting practices and “a supportive economic environment” has helped keep default rates subdued. I assume they’re referring to rising home prices, low mortgage rates, and an overall healthy economy.
Of non-QM loans that haven’t been securitized, Fitch has “been told” that default rates are also “very low as well.” Not sure who told them but good news nonetheless.
So whether they’re sold or kept in portfolio, non-QM loans appear to be doing quite well.
It’s Still Early, Non-QM Default Rates Will Likely Rise
Now the potential bad news.
Once non-QM lending does pick up, assuming it does, claims could begin to rise. And there’s a good chance those claims will be successful because they’ll likely only be filed in the event of a default.
The ones to watch out for, per Fitch, are those with “lower credit quality,” along with those that don’t comply with Appendix Q, which involves the verification of income and formulates a borrower’s DTI ratio.
Fitch expects to increase loss expectations for these types of non-QM loans. Some examples include bank statement programs that eliminate the need to verify tax returns (they seem to be quite popular).
However, non-QM loans that are merely interest-only products may fare much better if they are properly underwritten and only extended to high-net worth individuals who can clearly afford the payments.
Time will tell but at least things are going well so far in the non-QM space.