Fitch: High Loan-to-Values to Drive US RMBS Losses With ‘QM Patch’ End

Fitch Ratings, New York, said high debt-to-income loans no longer eligible for purchase by Fannie Mae and Freddie Mac are likely to have higher loss levels if the loans also have high loan-to-values.

The Fitch analysis shows factors such as credit score and LTV are more influential than DTI as drivers of borrower performance. The absence of the GSE backstop for mortgage insurance claims is expected to contribute to loss levels with the end of the Temporary Safe Harbor status that generally exempts Fannie Mae and Freddie Mac from liability under the Qualified Mortgage rules.

That exemption, known as the ‘QM Patch’, has been in place since the ability to repay rule was introduced in 2014 and is scheduled to end in January 2021. The number of U.S. residential mortgage borrowers potentially affected by the temporary QM rule is significant. Fitch estimates the GSEs will acquire more than $200 billion in loans this year with DTI ratios above 43%, which would be considered “Non-Qualified Mortgages” loans if the QM Patch were to expire.

Fitch said DTI is a good predictor of borrower behavior but other loan attributes play a larger role in borrower performance. The serious delinquency rate behavior of borrowers with DTI ratios above 45% changed for loans acquired after 2011 when the GSEs tightened LTV and credit score thresholds for higher DTI borrowers.

The performance of the loans with DTIs above 45% originated after 2011 illustrates how credit score and LTV are more influential on borrower performance than DTI. Relative to the 43%-45% DTI bucket, borrowers with DTIs above 45% have higher credit scores of 742-754, lower LTVs of 69%-75% and a 50% lower serious delinquency rate.

Suzanne Mistretta, Fitch Senior Director of U.S. RMBS, said DTI ranks fifth in predictive influence within Fitch’s loan loss model, behind credit score, LTV, economic risk and the number of borrowers on the mortgage note. “When these other risk attributes are positively selected, DTI’s influence on default risk is muted,” she said. “Uncertainty still surrounds the end of the rule. Although the QM Patch is currently set to expire in January 2021, it remains possible the Consumer Finance Protection Bureau will extend or revise the rule to allow the GSEs to continue acquisitions unaffected.”