The Fate of Qualified Mortgages: Credit Homogeny

The quick rise and abrupt fall of U.S. home prices in early 2007 paved the way for the country’s biggest financial crisis since the Great Depression. Mortgage underwriting standards dropped, firms were mismanaged and taxpayers bailed out the big banks.

Now, seven years after the bubble burst, the U.S. banking system is more concentrated and powerful than ever with a new commoditized product: Qualified Mortgages. Every loan will now be the same, no matter where or which bank lends. Price, flexibility, service and standards used to be differentiating factors that consumers took into account when choosing a lender and a mortgage, however these factors no longer apply in our new highly-regulated environment.

Qualified Mortgages are now the gold standard of the mortgage lending industry. Aimed to put a bandage over a bullet wound that is candidly already healed, the rule aims to protect consumers from predatory lending and banks from wrongful litigation. However, it does not come without a cost. The unexpected consequences of the QM rule are two-fold: small- to mid-tier financial institutions; and potential borrowers that do not meet the stringent credit requirements.

During the height of the mortgage crisis that began in 2007, bank consolidation continued to accelerate. According to William Mills Agency’s annual Bankers as Buyers report (http://www.williammills.com/case-studies/bankers-as-buyers/), the number of financial institutions continues to decline, but the shrinkage is due primarily to the unification of healthy institutions.

The total number of financial institutions is currently 13,706–926 fewer and 6 percent less than last year’s report–according to Federal Deposit Insurance Corp. and Credit Union National Association 2013 data. Less competition from small-to mid-size financial institutions is undeniably leading the industry into a top-five oligopoly.

The Consumer Financial Protection Bureau has stated there should be a healthy market of non-QMs. However, small- and mid-tier financial institutions have vocalized their concerns about intrusive regulatory oversight, excessive capital requirements and potential litigation risks associated with originating non-QMs.

According to the American Bankers Association’s 21st annual Real Estate Lending Survey(http://www.aba.com/Tools/Function/Mortgage/Documents/2014_RealEstateSurvey.pdf), which polled 208 banks, more than 80 percent of banks expect the new mortgage regulations to reduce credit availability, and more than two-thirds of responding banks will be restricting to lending only QMs.

The disparate impact on demographics that do not meet credit criteria to qualify for a QM will force them to pursue non-QMs, however, finding a financial institution that is willing to do so will be searching for a needle in the proverbial QM haystack. Furthermore, if said borrower does find a non-QM lender they can expect significantly higher rates than those available for a QM loan. 

The regulatory burden, litigation fears and compliance costs will restrict small- to mid-tier financial institutions’ business and force their hands into a QM-focused world where the top five reign supreme. An unintended consequence of the QM rule is credit homogeny. At what cost is the mortgage lending industry willing to pay for QMs?

(The views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service.)