As the one year anniversary of the Qualified Mortgage (QM) loan guidelines approaches, the time is right to reflect upon the impact and the uncertainty of QM vs. non-QM loans. We have spent the past year working with QM loans and developing smart solutions beyond QM to serve more borrowers. The non-QM terminology lends itself to the perception that a loan and/or borrower is somehow inferior to one who is “qualified.” As a result, there is skepticism, uncertainty and fear associated with “non-QM,” which is misguided.
As I recently discussed in an interview with the NY Times, we don’t live in a black and white world. But that’s what the QM guidelines are best suited for. I like to think of non-QM as “in living color” – an alternative that allows reasonable accommodations for real world scenarios – and real world borrowers.
Non-QM is NOT Sub-prime
Sub-prime loans are infamous for playing a role in the mortgage meltdown. At the time, sub-prime loans were generally characterized by high interest rates for individuals with poor credit and high loan-to-value ratios, and were associated with big prepayment penalties and other harsh terms.
There are a lot of responsible, credit-worthy buyers getting shut out of the market because they don’t fit neatly into the QM box. A Non-QM borrower still has to qualify, but within a more broad box than that of QM. With non-QM we aren’t letting the more complex financial factors shut down an opportunity before a more careful analysis. We’ve built a framework of smart underwriting principles and smart credit guidelines that allow us to consider more of a borrower’s overall financial profile.
Veering from QM Responsibly
Non-QM loans may not inherently be of greater risk. They are simply different and require more in-depth analysis and documentation. As lenders, we must determine how to safely go beyond QM criteria. When there is an item that doesn’t hit the mark for QM, we look for compensating factors that will fill the gap or change the financial picture.
Smart underwriting for non-QM means taking a more conservative approach to the typical QM Jumbo loan. More liquid reserves, equity or a larger down payment may be required. We will look for more, rather than less, in terms of verification. When a self-employed or retired borrower has difficulty meeting QM income verification guidelines, non-QM opens the door to consider other assets and equity as an alternative in the “ability to re-pay analysis”. For example, maybe we don’t have two years’ worth of W2 statements to verify employment income, but are there other forms of income that need to be considered? What about the young tech or start-up executive that doesn’t have an established credit history, but does have a large amount of liquid reserves?
As Rich Walton, RPM’s Senior Vice President of Capital Markets, said at the beginning of 2014, “Private capital will create an active market in non-QM loans and get back to ‘make sense’ lending, not the make ‘cents’ lending that got our industry in trouble in the past. Opportunities will exist to meet the needs of borrowers with higher debt levels, the self employed and clients with strong but varied forms of income and assets.”
Along with an investor and a private fund that considers risk the same way we do, RPM was able to tailor a program around smart underwriting principles, that doesn’t stray from what we’ve always done in terms of evaluating income and assets.
There is more to a non-QM loan than the terminology insinuates. To learn more about loan solutions that serve your needs and fit best with your financial profile, find a loan advisor near you. Want more information about non-QM loans? Ask about RPM’s Tailored Line of Loan Solutions.
By Rob Hirt