The January launch of the ability-to-repay rule and the associated qualified-mortgage definition will raise the overall cost of originating home loans, with borrowers taking the brunt of the financial hit, Standard & Poor’s Rating Services said Tuesday.
A few things won’t change, credit analyst Jack Kahan with S&P noted, but the new rules will increase expenses, extend foreclosure timelines and prompt servicers to less frequently select the foreclosure option over loan modifications and deeds-in-lieu of foreclosure in future circumstances.
S&P, which looked deeply into how the January launch of the rules will impact mortgage finance, warned that more borrowers are going to have a hard time accessing mortgage credit. And when they do, it will take longer and cost more in some cases.
While originators and aggregators are expected to continue in their origination of non-agency loans using existing credit standards, some originators are going to insist on limiting their risk to only loans that meet the qualified mortgage's 'safe-harbor standard', to ensure the underlying underwriting standards shield the company from litigation risk.
So who will be most impacted by the rules?
S&P says borrowers wanting interest-only products are likely to experience a slowdown in the borrowing process. And, under new underwriting standards, a very specific class of borrowers — those with high net-worth and non-wage incomes — may find it takes a bit more work to get through the originations process in 2014.
The end result will be a market where some lenders have no choice but to originate a few non-QM loans.
Raj Date, a former Consumer Financial Protection Bureau official, recognized room in the non-QM space earlier this year and launched Fenway Summer, a firm that hopes to offer lending solutions to borrowers who fall outside QM.
But no matter how firms respond, the January shift is going to have some impact.
Any expenses related to the changes will be passed onto borrowers, nullifying the basic principal of protecting homeowners from unexpected losses, S&P said when analyzing the slew of new rules.
Prices are expected to go up to cover new processes completed by originators in the underwriting process, the ratings firm said.
"Ironically, originators will need to watch these costs carefully, as they may increase points and fees, which will determine whether a loan can be considered a QM," S&P concluded.