Value of non-QMs, prepayment penalties, using humor at work
Today we'd like to discuss the value of a "non-qualified" mortgage on the secondary market and the future of prepayment penalties in residential mortgage lending.
What is the value of a non-QM loan?
If you're considering originating loans outside the protected qualified mortgage box, be sure to (1) adjust pricing accordingly and (2) budget for anticipated liability and repurchase costs. The CFPB estimates that non-QM loans will take a hit of somewhere between 12 and 40 basis points (that's price, not yield) (Preamble p. 590). So the same loan that sold last year at par would be sold at a slight discount of 99.88 to 99.60 if originated post-January 10, 2014 as a non-QM.
Whatever the real number--we can all make this prediction: it will be hard to sell non-QMs in the first couple of years (at least at a fair profit) ... so you may see lenders more likely to hold on to pools of non-QM loans until the uncertainty is removed through litigation. But what if the court decisions are unfavorable to lenders? Even if that happens, just having final decisions should make litigation less costly as there will be less to argue over. ATR requires a "reasonable" and "good faith" determination of ability-to-repay ... as those vague, subjective terms are defined by the courts, lawyers will have fewer bullets in the chamber, and efficiency will increase through increased settlements and stipulations to evidence/findings. In other words--the value of a non-QM in the next year or two will probably be greater in portfolio than on secondary, because it is unclear whether anyone will be willing to buy them at a fair price.
But despite the current market, the market will eventually open up for non-QM products because "non-QM is not sub-prime"-non-QM loans can still be quality products ... think of a 780 credit score, 50% LTV, and a 44% DTI that just happens to be a jumbo (= non-QM unless originated by "small creditor").
Is ATR/QM the death knell for prepayment penalties?
Here in New England we don't see too many prepayment penalties on mortgage lending anymore. But will we see even less now that ATR/QM is here? Here is a list of new restrictions on prepayment penalties:
Only permitted for fixed rate QMs (not allowed for ARMs or non-QMs)
Penalty can only apply--if at all--within 3 years
Penalty cannot exceed outstanding balance by (a) more than 2% in first 2 years and (b) more than 1% during 3rd year
Prepayment penalties also create QM points + fees problems, as the maximum penalty that could be applied has to be included--even if it is never charged! Finally--you cannot offer a loan with a prepayment penalty without simultaneously offering a product without a prepayment penalty that meets QM points + fees that you have a good-faith belief the borrower will actually qualify for. Sounds like a disaster in terms of policies/procedures/training ... and it is unclear whether it's worth the trouble. Good news? Well--if you've never done them before, this levels the playing field.
Tired of working through regulatory changes every year? Try to stay positive! Every swing brings me closer to the next home run. Babe Ruth. We have some jokers here at SCA, how do you use humor at work? Here's an interesting tip from authors Michael Lombardo and Robert Eichinger from FYI: For Your Improvement (5th edition):
Sarcastic? Refrain from using humor to veil criticism. Some people use humor to deliver negative messages. They are sarcastic and barbed in their humor. In a tense confrontation with an employee, to say, "I hope your resume is up-to-date," instead of saying, "Your performance is not what I expected. It has to improve or I will have to reconsider your continued employment," is not acceptable. There is a very simple rule. Do not use humor to deliver a critical point to a person or a group. Negative humor hurts more than direct statements and is basically chicken on your part. Say directly what you mean.
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**These are our opinions. We're not authorized, or willing, to express those of others.**