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About half of today's mortgage originations would not qualify as a safe loan under the qualified mortgage rules if the market were to remove all exemptions for government-sponsored loans, CoreLogic ($27.65 0.39%) said in a new report.
The Irvine, Calif.-based research firm made that conclusion in a new February MarketPulse Report examining the impact of the qualified mortgage and related rules such as the qualified-residential mortgage provision outlined by Dodd-Frank.
Right now, the rules’ potential impact is minimal since loans financed and guaranteed by the housing agencies and the Federal Housing Administration represent 90% of all originations, according to a report from Sam Khater with CoreLogic.
But when analyzing originations currently taking place against bench marks that will be set by the new mortgage rules, CoreLogic concluded that "loans financed or guaranteed by both the GSEs and FHA combined account for roughly 90% of originations. Thus, given that the loans approved by an automated underwriting system operated by Fannie, Freddie or FHA/VA are waived during a transition period, the near- and intermediate-term impacts of the rule are very small."
But CoreLogic says, "When the exclusion expires in seven years (or prior), it is estimated that only 52% of originations will meet the eligibility requirements of the QM rule’s safe harbor."
The QM rule's debt-to-income ratio ceiling of 43% removes roughly 24% of all originations from the qualified pool. And when adding the resulting impact of all the QM guidelines and related provisions, about 48% of today's qualified originations would not be eligible in a QM world without the GSE exemptions.
Once combined with the prudential regulators final draft and implementation of the risk-retention and related qualified-residential mortgage rule, the guidelines will remove 60% of what is currently originated in the market today from the so-called QM-QRM eligible pool. CoreLogic says the effect is it will leave "just 40% of the market QM- and QRM-eligible without a GSE exception."
But Khater clearly sees an upside to the impact QM will have on the mortgage marketplace.
"QM was implemented to minimize risk layering, which magnifies risk in unexpected ways. Will it succeed? In CoreLogic’s view, the answer is a resounding yes," he wrote.
"While QM and QRM remove 60% of loans, they remove more than 90% of the risk space, the DTI rule removes 36% of all serious delinquencies (SDQs), followed by loans with credit score of less than 640 (28 percent of SDQs) and the 10% down payment (18 percent of SDQs)."
Since the jumbo market currently accounts for 10% of all mortgage finance transactions, while lacking exemptions available in the conforming market, the QM rule will start to shake up the jumbo space in early 2014, Khater asserts. But the impact will not be as extreme. Khater says more than 62% of total jumbo originations today would meet the eligibility requirements of the QM safe-harbor provision.
"Similar to the overall market, DTI and low or no documentation combined have the largest impact, accounting for 30% of the jumbo market," he said. "Since down payment requirements are much higher for jumbo loans than conforming loans, the impact of minimum down payment requirement (QRM) is smaller for jumbo loans than for conforming loans."
In states like Nevada, only 42% of originations meet the safe harbor provisions of QM. And in Hawaii, only 43% of today’s loans qualify. Alaska situation is potentially worse with only 44% of current originations qualified for QM, based on CoreLogic’s analysis of the marketplace.
Overall, Khater concluded that QM in the near-to-medium term will be small and should "reinforce the role of the GSEs" in the market.
Jumbo loans will be moderately impacted in 2014. And in the long run, about half of all originations that pass easily pass through the system today will feel the effects of the rules, the report concluded.
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