Non-prime in a QM world?
The mortgage market is still going
Today I am in Las Vegas amongst more than 5,000 attendees at ABS Vegas, a mortgage investor conference.
Much like ABS East in Miami a few months ago, the conversations revolve around transparency, regulation, GSE reform and housing bubbles.
Since ABS East one big difference is the passing of the QM deadline earlier this month. We now live in a QM world, and "shockingly" the mortgage market goes on!
This is, of course, partly because GSE and FHA eligible loans are considered QM and this is the bulk of the market at the moment. But even for the non-conforming market it is still possible to originate QM loans. Non-conforming, specifically prime-jumbo, loans are either being put into bank portfolios or securitized and can easily fit into the QM standards.
Where could the private market go next? How about sub, excuse me, non-prime loans. Remember that the QM regulation sets no requirements for credit scores or LTVs. A non-prime borrower with a low credit score and a small down payment seeking a fixed-rate 30-year loan could very well fit within the QM guidelines.
Such a borrower may not be eligible for a conforming loan so the question is if there is a bank willing to originate the loan and put it in their portfolio or an investor willing to buy a security based on this loan, and at what price.
Maybe "at what price” is the problem we are currently facing. Behavioral economics has shown that the pain of loss is felt more strongly than the joy of gain.
In this instance investors remember oh so well that pain of loss and are, as a consequence, setting the price higher than may be required to cover the credit risk of a prudently underwritten fixed-rate mortgage to a non-prime borrower.
Of course there are structural impediments to a robust return of private capital to housing finance, yet non-conforming prime jumbo and non-prime are two market segments that can be effectively priced and in many cases even be within the guidelines of QM.
Growing the private market doesn’t just mean reducing the government’s share, but could also include getting back into market segments that private capital has successfully supported in the past.