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DBRS: CFPB rules, tighter credit driving down mortgage originations

Until uncertainty with QM, ATR settled, many buyers will be shut out

regulatory changes
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Federal regulations, coupled with a general shift from refinance to purchase activities, have resulted in historically low volumes of mortgage loan originations and organic servicing growth, even though home prices have continued to rebound and delinquency and foreclosure rates are at their lowest levels in years.

Those are the findings of the DBRS’s U.S. Residential Mortgage Servicing Midyear Review and 2014 Outlook, which discusses servicing performance, trends and recent regulations, as well as DBRS’s expectations for the remainder of 2014.

“During the first half of 2014, the Consumer Financial Protection Bureau took center stage, as the Ability-to-Repay, Qualified Mortgage and servicing rules went into effect,” said Kathleen Tillwitz, managing director of operational risk at DBRS. “We believe the issuance of the final rules alleviates ambiguity for servicers and has served to bring much-needed reform to the servicing industry.”

But she noted the rules are complicated, requiring a high degree of technological capabilities to ensure compliance, and not all industry participants fully understand how to quantify the liability for non-compliance. 

Further, it seems that there could be a brighter future than previously expected for non-QM loans.

“In the first half of 2014, most of the loans that were originated were QM Safe Harbor loans,” Tillwitz said. “We expect this trend to continue as market participants quantify the risks of borrower claims and determine investor appetite for non-QM loans in the secondary market.”

The small amount of non-QM loans originated to date were typically made by large banks in an effort to accommodate a customer with significant liquid assets and then held for portfolio.

Tillwitz recognizes that the rules are still very new, having only been in effect for six months, and believes that over time, QM rebuttable presumption and non-QM loan originations will likely increase, as court precedents are set and greater certainty around liabilities and damages is established.

“In the meantime, this has greatly constrained the availability of credit and made it difficult (or more expensive) for affluent, self-employed or divorced borrowers with alimony and child support payments carrying back-end ratios greater than 43% to get a mortgage, resulting in many deserving borrowers, particularly first-time homebuyers and those with high back-end ratios, being unable to achieve home ownership in 2014,” Tillwitz said.

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