The qualified mortgage definition that's linked to the ability-to-repay rule doesn’t kill lending outside the QM definition, but it does create a no-risk, no-reward type of mortgage environment, says James Frischling, president of NewOak Capital.
Frischling says the new lending rules help originators remove litigation risk if they stay within the confines of QM when issuing a loan, but the sweet spot financially is still outside QM in the non-QM segment.
"Lending is a function of risk and reward," Frischling wrote Monday. "The new rules will help standardize parts of the mortgage market and that’s a good thing, but the opportunity to operate outside qualified mortgages will create opportunities for capital providers to pursue greater returns. No risk, no reward."
Even credit unions are seeing the market in terms of a trade-off – if you want safety, you stay inside QM, if you want to grab larger returns in the form of higher rates – non-QM may be the way to go.
But before signing off on non-QM, the credit union market is facing a bit of uncertainty, prompting leaders in the segment to offer assurances to the industry. The National Credit Union Administration, which charters and supervises federal credit unions, issued a statement to the industry saying non QM lending "can be an effective member service if conducted safely and soundly."
Furthermore, NCUA Chairman Debbie Matz advised credit unions that issuing non-QM loans alone will not lead to extra scrutiny.
She wrote the agency "will not subject a mortgage to safety-and-soundness criticism solely because of the loan's status as a QM or non-QM."
However, she added, "credit unions choosing to make non-QMs will need to take into account the potential new market and legal risks."
NCUA examiners will be watching for credit risk, liquidity metrics and concentration when it comes to loans.
The Credit Union National Association even urged NCUA examiners not to discourage non-QM loans when the mortgages meet applicable regulatory standards.