Hands off LTV! (for QM purposes)
Do you use loan-to-value as one factor considering ability to repay? Do you use LTV as a "compensating factor" for non-qualified mortgages? Just a note today on why that might not be the best idea.
2014 regulations make considering a borrower's ability to repay a regulatory requirement. The requirement includes 8 mandatory ATR determination factors. Beyond the 8 factors, lenders are generally free to consider any additional reliable ATR factors-
Except for one: Loan-to-Value (LTV).
We're talking about a regulation entitled "ability to repay" ... it is not concerned with the risk to the bank of taking the loan. Leading up to the 2008 crisis, many lenders were criticized for underwriting to collateral, rather than the borrower's ability-to-repay--"who cares if the borrower can't afford this, home prices are going to increase in value forever, right?"
So it's surprising to still see:
Lenders making their "ATR assessment" based on the 8 mandatory factors and also on LTV
Lenders using LTV as a "compensating factor" for making a non-QM loan.
Stopping this kind of rationale is exactly why we have the ATR rule to begin with.
To be clear-- considering LTV for risk purposes is absolutely fine-- actually, it would be reckless and unwise not to consider this. But, LTV simply cannot be a factor for purposes of approving a borrower under the ability-to-repay rule. When LTV comes into play, make sure it is separate from the ATR determination - "Yes, this borrower has the ability to repay, but his LTV is too high for us. Yes, this borrower has the ability to repay, and separately, yes, the borrower's LTV is within our limits."
Without separating LTV from ability-to-repay, as in the two examples above, you're in for trouble, especially with low LTV loans. Try proving to a jury or investor (forget regulators, because that's not where the real risk is) that you originated a loan because of ATR and not LTV in a case where the borrower has a high back-end ratio and poor credit but there's a 20% LTV.
Note:
LTV may indirectly affect ability to repay, and that's okay! For example, if it affects whether PMI is required, or whether it causes Fannie to increase the cost of credit with LLPAs.
In other news:
The CFPB indicated last week that it will be taking surprisingly restrictive interpretations of the LO comp rule, particularly as it affects varying compensation based on purchase/refi, home equity loan production, and geography. Call in to discuss details if interested
Ed DeMarco (former FHFA chief) took out a restraining order against Richard Hornsby (current FHFA COO) and Hornsby faces charges for threatening to shoot him!
Another of the ABA's "lighter side" jokes: "Edward Snowden urged technology companies to improve their encryption techniques in order to prevent hacking. Then he said, "But not right away, I'm still using Obama's Netflix password to watch House of Cards." - Jimmy Fallon
The GSEs are making huge changes to make credit more available to borrowers, allowing lenders (so long as they have clean files) to stretch the credit box, see this WSJ article and the actual Fannie/Freddie announcement for more info.
I didn't belong to a fraternity in college, but I feel like I do now. Mortgage bankers are a tight-knit community-- everyone helps, no- one forgets (good or bad), and trust is essential. What is it about this industry that encourages such strong bonds and attracts so many big- hearted people, with such high integrity and loyalty? Is it the high- risk/high-reward nature of our business? (Surviving close calls is often cited for bringing people together). Is it the specialization and devotion required?
Be true to your work, your word, and your friends.
- Henry David Thoreau
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