A new report published by Kroll Bond Rating Agency (KBRA) is outlining potential scenarios that could positively and negatively impact the mortgage market after the Consumer Financial Protection Bureau (CFPB) allows the expiration of the temporary qualified mortgage (QM) provision, commonly known as the GSE Patch.
The expiration is scheduled for Jan. 10, 2021. KBRA’s “Potential Effects of the GSE Patch Expiration
” predicts “a potentially swift reduction in overall lending volumes will likely persist for the short term following the expiration of the GSE Patch”–KBRA added Fannie Mae and Freddie Mac are now purchasing more than $150 billion in annual originations that comprise loans with debt-to-income ratios greater than 43 percent. Also being forecast is “increased price discrimination among formerly GSE Patch-eligible loans, whereby such loans have higher rates that will disproportionately impact lower-income borrowers.”
However, KBRA also forecast a “commensurate tailwind to origination in the non-QM lending sector, already rising at a CAGR of 200 percent, with established originators and issuers of non-QM loans being best positioned for growth.” And while KBRA believed FHA lending will increase after the expiration date, it was uncertain how the private market could handle a new wave of non-QM activity.
“Given the rise of non-QM lending and related PLS issuance in recent years, there is no shortage of nonbank lenders willing to serve the vast majority of borrowers,” the report said. “Still, the PLS market’s ability to serve this additional volume will necessitate a very substantial increase in investor participation and potential structural changes to the RMBS 2.0 market. While many investors are attracted by non-QM returns, there has been some well-founded reticence to invest heavily in a market that is untested by an economic downturn and for which loss severity and litigation data is not mature.
“While market participants, including KBRA, have made assessments for the potential likelihood and impact of ATR from an assignee liability standpoint, there has been virtually no empirical evidence of how non-QM risk may unfold to lenders and PLS investors,” the report added. “Given the market’s almost singular focus on GSE lending post-crisis, educating investors on non-QM standards in an ATR mandated regulatory environment will be critical going forward.
And whether any of this will come about is still open to speculation. KBRA added that the CFPB’s “willingness to consider changes to the QM definition” could result in new policies that could be in place after the GSE Patch expiration occurs.