Greater Loss Projections for Some Non-QMs

Non-QM loans included in residential mortgage-backed securities
that have material exceptions to the income documentation standards to QM requirements will be penalized with both higher default and higher loss severity assumptions.

In fact, the combined penalty could wind up increasing loss projections by as much as two times that
of a similar non-QM loan with documentation that does meet the QM standard.

That assessment came from Fitch Ratings.

The New York-based ratings agency noted that the few non-QM loans which have been included in RMBS have had “very high credit quality.”

But while these loans might not have
met the QM standards because of features such as interest-only payments or debt-to-income ratios in excess of 43 percent — Fitch explained that they have generally followed the income documentation standards in Appendix Q of the Ability-to-Repay rule.

Other deviations which Fitch considers immaterial that won’t impact its non-QM default and loss severity treatment include missing signatures or dates on tax returns when 4506 forms are obtained and self-employed borrowers who don’t provide updated profit-and-loss and balance sheet statements even though they did provide two years of full income tax returns.

But loan programs like those that allow self-employed borrowers to provide bank statements instead of tax returns are considered material devisions.

“Fitch believes such programs would be more vulnerable to borrower claims that the loan violated the Ability-to-Repay rule than loans underwritten with documentations standards that met Appendix Q,” the announcement stated. “Consequently, Fitch would likely increase the claims probability and claims success rate from those described in its published criteria.”

Fitch said such situations would increase loss-severity assumptions by 1.1 to 1.2 times versus that of a non-QM loan with standard documentation, while, the probability of default would likely be increased 1.25 to 1.75 times.