A report from Fitch Ratings found that major U.S. residential mortgage servicers have yet to see any borrower claims since the ATR rule went into effect in January 2014, but this nonexistent claims trend could soon come to an end as certain non-Qualified Mortgage (QM) loans becoming more prevalent in the market.
Under the ATR rule, lenders must do their due diligence in ensuring a borrower has the financial wherewithal to repay the loan over time. A new compensation structure for loan originators also eliminates any incentives that might encourage lenders to push people into loans with higher interest rates than they qualify, CFPB Director Richard Cordray said in January 2014 when the rule was rolled out.
Addressing the new mortgage servicing rules, Cordray said, "In short our rules mean simply that mortgage servicers must now do their jobs."
He continued, "It may seem silly that we need rules to tell servicers to answer the phone; not to lose people's paperwork; to tell borrowers how much they owe. It might also seem silly that we need a rule telling lenders they must pay attention to whether borrowers will be able to repay the money that is lent to them. But we have lived through the financial crisis. We have seen with our own eyes the grave dysfunctions in the mortgage market. There was an embarrassingly long list of things that should have happened but never seemed to happen. Our new rules are aimed at setting things right again."
Fitch said that the drop in borrower claims to date was expected in the industry. "Most loans (including all GSE-eligible loans) meet the definition of a QM and receive safe harbor protection from the ATR rule. In the non-agency sector, few non-QM loans have been securitized to date," the report stated.
Of the more than 10,000 loans included in Fitch-rated newly originated mortgage pools since the start of 2014, only 14 have been classified as non-QM and are thus vulnerable to ATR claims, according to Fitch.
"Of the small fraction of loans not eligible for safe harbor, the combination of tight underwriting and a supportive economic environment has kept default rates low," the report said.
Since the start of 2014, only three loans are currently more than 60 days delinquent in the newly originated Fitch-rated mortgage pools.
Since Fitch expects ATR claims to generally only occur after a default, "lower credit quality or non-appendix Q non-QM loans having a higher default risk may have a higher probability of a successful claim. Fitch is likely to apply increased loss expectations for these loans. Non-QM origination volume for these products, while still limited today, appears to be growing and could become more common in the future," the report noted.