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January 10, 2020  

Crisis Memories Prompt Non-QM Intervention

The Structured Finance Association is taking steps to address weakness among nonqualified mortgages before federal policymakers do.

The 30-day delinquency level across all types of home loans that don’t meet the Consumer Financial Protection Bureau’s “qualified-mortgage” standards is approaching 5%, according to Kroll.

Within that category, the figures look even worse for “bank-statement” accounts. Those loans, which don’t carry as much income documentation as traditional mortgages, often are extended to the self-employed or foreign nationals. They have come to make up more than a third of all nonqualified mortgages.

To that end, SFA chief executive Michael Bright said the trade group is moving quickly to form a task force that would develop “best practices” for the origination of nonqualified loans. The group would include representatives from bond issuers, investors and rating agencies.

Sources are pointing to DBRS Morningstar mortgage-bond rating head Quincy Tang and Kroll managing director Jack Kahan as being involved. SFA also will host a panel on nonqualified loans at its “SFVegas 2020” conference, which takes place Feb. 23-26 at the Aria Resort & Casino in Las Vegas.

By self-policing, the hope is to avoid a situation in which Congress and regulators come to view the industry as engaging in the same types of reckless behavior that led to the 2007-2008 financial crisis — and take steps to intervene. “People in Washington would be concerned, even mad, if bank-statement underwriting were to become a big, important part of the market,” Bright said. “It’s starting to feel like 2003 and 2004, and we have to be careful. It could be bad for the entire market ecosystem.”

The concerns coincide with continued growth in the market for bonds backed by nonqualified mortgages. Issuers sold $23.1 billion of such securities in 2019, up from $8.7 billion in 2018, according to Asset-Backed Alert’s ABS Database. And the supply could explode upon the January 2021 expiration of a “patch” that currently enables Fannie Mae and Freddie Mac to buy large swaths of loans in the sector.

But as more lenders have moved into the nonqualified-mortgage space, underwriting standards have eased and loan performance has waned. DBRS Morningstar said in a Jan. 8 report that while bond performance remains unaffected, more nonqualified loans became seriously delinquent during the second half of 2019.

Meanwhile, issuers whose early deals were backed by loans requiring 24 months of bank statements now are allowing increasing numbers of borrowers to furnish records going back only 12 months. Consider that 55% of the collateral for a $511.3 million securitization from Angel Oak on Nov. 19 consisted of 12-month statement loans, with such accounts making up 20% of the assets for a $471.5 million offering from Deephaven Mortgage on Nov. 8.

What’s more, an increasing number of nonqualified-loan programs require fewer than 12 months of bank statements.

Some lenders already have run into trouble. Most recently, Sterling Bancorp suspended operations on Dec. 9 following a loan-documentation audit.

A large number of nonqualified-loan borrowers have subprime credit scores. To put their performance in perspective, a mere 0.5% of prime-quality mortgages currently are 30 days past due, according to Kroll.

The qualified-mortgage rule was implemented in 2016. Under the measure, only issuers of bonds whose underlying receivables meet those standards are exempt from a Dodd-Frank Act rule that they retain 5% stakes in their deals. Typically, non-qualified loans are extended to borrowers with debt-to-income ratios exceeding 43%.