Editor: David Reiss
Brooklyn Law School

December 2, 2013

Happy New Year for Mortgages?

By David Reiss

S&P has posted How Will Mortgage Loan Originators, Borrowers, And RMBS Securitization Trusts Fare Under The New Ability-To-Repay Rules?  This research report finds that

  • The ATR [Ability to Repay] and QM [Qualified Mortgages] standards under TILA [the Truth in Lending Act] will require loan originators to make a reasonable, good faith determination of a borrower’s ability to repay a loan using reliable, third-party written records.
  • If violated, originators and assignees can face liabilities and litigation brought on by borrowers during foreclosure proceedings and even outside of foreclosure proceedings. However, they can be protected from some of these liabilities if a loan meets the QM standards.
  • Depending on the loan’s status, increased loss expectations resulting from additional assignee liability, longer liquidation timelines resulting from borrower defenses in foreclosure proceedings, and additional loan modification experience can affect securitization trust performance.
  • Sensitivity testing using the damages outlined in the rule suggests that additional loss experience will generally be mild for prime jumbo backed securitizations even under conservative assumptions for litigation risks. Trusts backed by loans with higher credit risk, lower balances, and originated by unfamiliar or below-average originators will be at risk of higher losses than prior to the rule.
  • We expect that while the rule will prevent underwriting standards from loosening towards the more risky mortgages originated during the 2006 and 2007 financial crisis, it may also limit credit access to borrowers and make it more difficult to obtain a mortgage loan. (1)

I think that only the last two points are really newsworthy, particularly the last one. Whether the credit markets tighten too much from the new rules is the $64,000 question.

S&P appears to be arguing that the rules will constrain good credit too much. Time will tell if that is the case, as lenders fill the QM sector and the non-QM sector. The non-QM sector provides, for example, interest-only mortgages. There was a lot of bad lending involving interest-only mortgages, so it will be interesting to see what that market sector looks like as it matures over the next few years.

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