Investors are increasingly interested in non-QM loans, and Moody’s Investors Service is seeking commentary on its proposed approach to evaluating and rating QM versus non-QM loans for securization as residential mortgage-backed securities.
The final standards will help provide a blueprint for the credit enhancement necessary to acheive triple-A in at least one tranche of future deals. These deals normally require the risk mitigation input from two credit ratings agencies.
The Consumer Finance Protection Bureau’s “Ability to Repay” rule established the QM category, which took effect Jan. 10.
Moody’s, noting that the ATR rules creative incentives that could lead to incremental risks for RMBS trusts, is seeking input to determine the best way to rate both QM and non-QM RMBS products.
The private-label RMBS market will likely see more issuance in 2014 than 2013 – which saw $15 billion in new issues, said Kevin Duignan, global head of structured finance at Fitch Ratings. However, since QM came into effect earlier this year, the market is somewhat quiet.
Fitch recently issued its own ratings guidance on QM securitizations.
Volume is way down in the issuance of privately backed RMBS, even as there seems to be no plan forthcoming to bring private capital back and no real momentum in extricating the government from the GSEs. The GSEs currently guarantee nine in 10 new mortgages because of the lack of private capital coming into the space.
“The broad scope of the ATR rules allows borrowers to claim they were wrongly given loans that they would not be able to repay,” says Yehudah Forster, Moody’s vice president and senior credit officer. “Moody’s proposes changes to the RMBS methodology that would flag loans at risk for ATR claims and then lays out the framework for assessing that risk.”
Moody’s new approach will identify potential underwriting flaws that could result in ATR violations or disqualification of loans’ QM status.
“Data discrepancies, or debt-to-income ratios and points and fees close to the QM thresholds would all raise red flags that these loans are at risk of ATR challenges,” Forster said.
Moody’s will scrutinize the originator or aggregator’s ATR procedures and loan-level third-party diligence reviews for risk of ATR violations, and assess the strength of the reps and warranties.
“Some transactions will contain non-QM loans from high-quality buyers, who pose minimal ATR risk,” adds Forster.
However, for transactions containing non-QM loans from non-prime borrowers or Rebuttable Presumption QM loans, Moody’s would incrementally increase loss severity levels to account for the losses resulting from ATR claims.