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What to Make of the QM Patch Moving Forward

loan applications

The AEI Housing Center discuss the future of the QM patch [1], more specifically what can be seen, and what is not foreseeable. 

AEI states that foreseeable results from the patch are higher home prices, and the unseen are borrowers who would not have needed the Patch, had the home-price inflation caused by the Patch not occurred. 

According to the information, the GSE Patch allowed borrowers to take on additional debt, and the GSEs and FHA were in a “favored position”  to insure loan that exceeded the debt-to-income (DTI) limit of 43% imposed by private lenders. Additional leverage helped price growth for lower-priced homes at a quicker rate than for higher-priced homes. 

A correlation exists between faster home-price appreciation and the existence of higher DTIs. From 2012-2018, sections that had above average DTIs (above 37%) experienced appreciation quicker than the average. 

“Thus, a policy that assists buyers in taking on high DTI levels simultaneously undermines home affordability, driving up home prices faster than they would have, absent the Patch-provided stimulus,” the report states. 

In 2017, about 17% of borrowers with incomes below $80,000 had DTIs above 43%, which increased to 26% by 2017. Higher income borrowers saw their dependency on the patch rise from 11% to 17%. 

The sharper increase in reliance on DTIs above 43% for borrowers with incomes below $80,000 is due to the more rapid home price appreciation for entry-level homes,” according to the report. 

Last year, Standard & Poor Global (S&P) reported [2]that non-QM products are gaining popularity since being introduced. 

The report states that the non-QM market is the fastest-growing segment of non-agency residential mortgage-backed securities [3] in the U.S., despite still being a relatively small slice of the pie. The non-QM market is on track to double, or even triple, last year's securitization issuance within this year.

S&P found that there have been 20 odd transactions year-to-date, totaling over $6 billion in issuance, which is already almost double 2017's full-year volume. S&P also notes that, when compared to other RMBS categories, non-QMs have prepaid quicker, often soon after loan origination. The report found a conditional prepayment rate (CPR) 35%.