Now that the industry has its long-awaited “qualified mortgage” (QM) definition, Fitch Ratings believes jumbo prime securities are poised to see a jump start.
After leaving housing professionals in suspense for months, the Consumer Financial Protection Bureau (CFPB) finally released in early January its rules for what constitutes a QM. The guidelines are designed to spur the creation of safe, affordable mortgages by prohibiting certain practices (such as riskier interest-only or negative amortization loans) and setting up criteria for ascertaining a borrower’s ability to repay. The rules also establish legal “safe harbors” (based on loan risk) for creditors who responsibly lend, protecting all parties involved in the mortgage process.
While many analysts anticipate a kick start in lending and securitization now that the rules are clear, Fitch asserts most of the underwriting guidelines suggested have already been put into practice since the financial crisis, even if the criteria weren’t standardized across the industry.
However, the ratings agency sees the QM definition as a boon for the jumbo prime market.
“Fitch believes the qualified mortgage definition is positive for the jumbo prime residential mortgage market, as it removes the uncertainty that has paralyzed mortgage lending for the past few years and is an encouraging step in easing credit for traditional prime borrowers,” Fitch said in a release. “Further, finalizing the rule on QM will help advance the determination of a qualified residential mortgage (QRM), an additional constructive step in re-starting the jumbo securitization market.”
Additionally, because the QRM definition for exemption is linked to that of the finalized QM rules, Fitch believes the debt-to-income (DTI) requirement (which is 43 percent for a QM) is now clear, removing another concern for residential mortgage securitizers.
“The 43 percent DTI threshold casts a wide net for qualifying jumbo prime and possibly strong alt-A credit quality borrowers. Roughly 83 percent of the loans comprising recent securitizations would likely comply with the QM standard. The ruling is likely to have the biggest impact on securitizations of interest-only and higher DTI loans associated with the more affluent borrowers,” Fitch said.
However, there is one unknown variable: the down payment requirement, which has not yet been addressed by regulators. Fitch believes the finalization of the QRM hinges on that definition, which is expected this year.
“Ultimately, the re-start of private label securitization market will depend on this definition and clarity on risk retention rules, the application of Basel III and other liquidity rules, and a decision on agency guarantee fees,” Fitch concluded.
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