CoreLogic: With QM GSE ‘Patch’ Set to Expire, Impact Warrants Closer Investigation
In two blog posts last week, CoreLogic, Irvine, Calif., examined the relationship between loan pricing and loan performance in context of the coming expiration of the Consumer Financial Protection Bureau’s Qualified Mortgage “GSE Patch.” The blogs noted little distinction in loan delinquencies in certain rate spread categories, but noted closer investigation is warranted.
The five-part series, authored by Archana Pradhan and Pete Carroll, offer insights on balancing risks (loan delinquency) and benefits (mortgage credit access) in the QM Safe Harbor, following expiration of the GSE Patch. The series analyzes merged CoreLogic Loan-Level Market Analytics data with Home Mortgage Disclosure Act data. CoreLogic then creates a cohort of home-purchase loans using 2010-2017 loan vintages.
The authors noted mortgage loans tend to fall into one of the following compliance categories:
–QM Safe Harbor loans are foundational mortgage products (e.g., 5/1 ARM and 30-year fixed) that are generally considered to have sustainable borrower repayment features.
–QM Rebuttable Presumption loans generally have higher Annual Percentage Rates (APRs) than Safe Harbor loans and require extra steps by lenders to ensure borrower repayment sustainability.
–Non-QM loans are more complex mortgage loans, such as negatively amortizing mortgages.
“These categories matter to mortgage borrowers as they bear on the balance between borrower repayment sustainability and mortgage credit access, since QM Safe Harbor loans have objectively composed the predominant share of annual mortgage lending volume,” CoreLogic said.
In Part IV (https://www.corelogic.com/blog/2020/1/expiration-of-the-cfpbs-qualified-mortgage-qm-gse-patch-part-iv.aspx), the CoreLogic analysis found across key loan delinquency measures (a proxy for borrower repayment sustainability), loan delinquency increased as rate spread increased. The percentage of loans that have ever been 60 days late in the below 1.5% rate spread category was 1.4% as compared to roughly 4.1% or higher for the 1.5% and above rate spread categories. There was also little distinction in loan delinquency between the 1.5% – 1.74% and the 1.75% – 1.99% rate spread categories.
“These results suggest that there is a relationship between rate spread (loan pricing) and borrower repayment sustainability for Conventional loans that warrants closer investigation, including whether or not a 1.5% over APOR QM Safe Harbor cap is any more indicative of borrower repayment sustainability than a 2.0% over APOR cap, all things being equal,” the authors said.
In Part V (https://www.corelogic.com/blog/2020/1/expiration-of-the-cfpbs-qualified-mortgage-qm-gse-patch-part-v.aspx), CoreLogic merged its Loan-Level Market Analytics and HMDA data to validate our findings and uncover additional insights, confirming the delinquency rate was lowest for loans with a rate spread below 0 and highest for the loans with rate spreads above 2.0%. It also noted increases in loan delinquency as rate spreads increased.
“However, also consistent with our prior analysis, we observe little variation overall in the Conventional loan delinquency rates between the 1.25% – 1.49% and 1.50% – 1.74% rate spread categories, respectively: EPD rates were about the same for each rate spread category (0.5%), and the 60 day delinquency rate was only slightly higher for the 1.50% – 1.74% rate spread category (1.8%) as compared with the 1.25% – 1.49% rate spread category (1.6%),” CoreLogic said. “While the factors that might account for these variations will require further research, the similarity in Conventional loan delinquency rates from 1.25% over APOR through 1.74% over APOR further suggests that closer examination into whether the QM Safe Harbor rate spread cap is appropriately calibrated, all things equal, is reasonable.”
When considering the impacts of the expiration of the GSE Patch, the authors said policymakers “ultimately have a difficult judgment call to make with respect to whether the benefit of increasing the QM Safe Harbor rate spread cap (loan pricing) for Conventional loans exceeds the risks of increased borrower loan delinquency (a proxy for borrower repayment sustainability), all things equal. Moreover, regardless of whether the QM Safe Harbor rate spread cap is ultimately increased, consideration of the proper role for ability-to-repay-specific underwriting criteria (including methods for calculating underwriting criteria and verifying borrower financial resources) in a new ATR/QM Rule is warranted. These judgments become particularly relevant in the event our economy experiences a recession, placing upward pressure on delinquency rates.”