In fact, the final rules are not as strict as originally proposed. With the housing recovery still in its infancy and facing rising interest rates, regulators were concerned about tightening an already tight lending environment. So could we have another epic crash?
“In the short run, over the next half decade to decade, it’s going to be extremely unlikely, virtually impossible for that to happen because all the programs that created the bubble are outlawed now,” said David Stevens, CEO of the Mortgage Bankers Association. “What really concerns me is how are people going to behave outside the QM protection.”
(Read more: Why shut down Fannie and Freddie now?)
Lenders can still operate outside the QM rules but don’t get the same legal protections in cases of default, and they cannot sell the loans to Fannie and Freddie. They need to hold on to the risk. Still, the non-QM market is growing even before the QM rules take effect in January.
The leader of this movement is Date himself. He formed a firm, Fenway Summer, to launch the new mortgage products.
“I think the best credit models, the ones that really pay for themselves in terms of risk-adjusted returns over time, are the ones where you make great credit decisions and then you actually bear the risk of those decisions working out well or working out poorly,” said Date, adding that he is optimistic about this new market.
Loans outside QM will be more costly but will offer investors greater returns. They will still have to comply with ability-to-repay but not the QM standards. Therefore, borrowers who may have very large assets but little to no income could qualify. Interest-only, adjustable-rate mortgages would also fall into this category.
“I am quite confident that a senior funding market will develop for non-QM loans—I have no doubt about that at all,” Date said. “It is simply too big of a market.”
Wells Fargo will also operate outside QM for some loans.
“When you look at the entire profile of the borrower, we can be comfortable they have the ability to repay even though their income by itself may not fall into the standard dictated by the qualified mortgage,” said Codel, who added that non-QM loans may be an even safer product because lenders will hold more risk and be subject to legal action in the case of a loan failure.
(Read more: Map: Tracking the recovery)
Still, the non-QM market does open the doors for lenders seeking higher returns through higher risk, which is how much of the recent trouble began, at least in the mortgage-backed securities trading space. Regulations for investors in loans are still being finalized, but recent proposals follow the QM standards.
“That is where I think drawing the boundaries around the rules can be a good thing but it can also set up bad behaviors outside those boundaries, and we’re going to see those kinds of institutions being created, I’m confident of it,” said Stevens.
—By CNBC’s Diana Olick. Follow her on Twitter @Diana_Olick.
Article source: http://www.cnbc.com/id/101036630