Home loans that don’t carry a Qualified Mortgage designation will present more risk for loan securitization trusts, though the degree of additional risk will depend on the originator and the strength of the representations and warranties.
Losses are expected to be more severe on residential mortgage-backed securities that include non-QM loans than QM-backed RMBS.
The reason for expected higher loss severities is increased legal costs and greater penalties for non-QM securitizations.
That is according to Non-QM US RMBS Face Higher Risk of Losses Than QM, but Impact on Transactions Will Vary from Moody’s Investors Service.
The QM and Ability to Repay rules will be phased in by the Consumer Financial Protection Bureau on Jan. 10, 2014.
The ratings agency said that the extent of RMBS risk will depend on mortgage originators’ practices and documentation as well as the strength of the transactions’ representations and warranties and whether the transactions include indemnifications that shield them from borrower lawsuits. This will determine the degree of additional credit enhancement required.
“In non-QM transactions, a defaulted borrower can more easily sue a securitization trust on the grounds that the loan violated the ATR rule,” the report’s co-author, Moody’s Senior Vice President Kruti Muni, said in an announcement. “Some QM loans will also be subject to a greater risk of penalty than others.”
Moody’s noted that loans with a safe harbor from Ability to Repay will be less likely to incur penalties than loans with a rebuttable presumption.
This is because safe harbor borrowers can only sue if they can successfully challenge the loan’s QM status.
“The specificity of most QM requirements, such as the prohibition of some affordability products as well as excessive points and fees, will make challenging the QM status difficult for borrowers,” co-author and Moody’s Vice President Yehudah Forster stated.
