CoreLogic: QM, QRM Rules Remove 60% of Loans and 90% of the Risk

CoreLogic: QM, QRM Rules Remove 60% of Loans and 90% of the Risk

02/12/2013 BY: KRISTA FRANKS BROCK

About 60 percent of loans written today would not be acceptable under the finalized rules for a qualified mortgage (QM) and the anticipated rules for a qualified residential mortgage (QRM), according to new research from CoreLogic.

CoreLogic analyzed 2.2 million loans written in 2010 to determine what percentage of them meets QM and QRM guidelines. The firm chose 2010 because underwriting trends during that year are quite similar to today’s.

QM rules would eliminate about 48 percent of today’s mortgage originations, and when the QRM (with a 10 percent down payment requirement) is added to the equation, about 60 percent of today’s loans would be eliminated.

The effects will be somewhat larger on the purchase origination market compared to the total market because of the anticipated QRM down payment requirement, which would eliminate about 27 percent of purchase originations compared to 13 percent of total originations.

“The combined impact of QM and QRM is that only 25 percent of purchase originations would meet the eligibility requirements of the QM rule’s safe harbor,” according to CoreLogic.

While the impacts will be vast, CoreLogic points out the immediate impacts of the QM and QRM rules will be minimal because for the next seven years, loans that meet

the underwriting requirements of the GSEs and the Federal Housing Administration (FHA) are exempt from the new guidelines.

“The irony of the exemption is that it reinforces the role that the GSEs play in the market, making it harder to enact GSE reform,” CoreLogic stated in its report.

Currently, about 90 percent of newly originated loans are backed by the GSEs and/or FHA, so the market will be able to continue in its current path for the next several years.

Unlike the conforming market, the jumbo loan market is set to begin feeling the impact of QM rules as soon as they take effect.

However, the impact in this sector is somewhat smaller. More than 62 percent of jumbo loans would pass the QM safe harbor guidelines, and only 2 percent would be disqualified by the 10 percent down payment requirement, according to CoreLogic’s estimation.

While the qualifying rules will be the same across the nation, their impact will vary by region and state, CoreLogic said. QRM rules will impact lower-income regions—the South and Midwest—more than higher-income regions.

About 25 percent of all loans in Arkansas will the impacted by the QRM rule—the largest percentage in any state.

QM rules will be felt most in Nevada, where only 42 percent of loans qualify. South Dakota will be the least impacted state, as 67 percent of its loans already adhere to QM guidelines.

While CoreLogic makes it clear the impact of the QM and QRM rules will be monumental when their exemptions expire in seven years, the firm also answers the question of whether these rules will, in fact, minimize risk in the market. “In CoreLogic’s view, the answer is a resounding yes,” the firm stated in its report.

When observing the amount of 2010 loans that both do not qualify under the new rules and have fallen delinquent, CoreLogic came to the conclusion that “[w]hile QM and QRM remove 60 percent of loans, they remove 90 percent of the risk.”

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