It Was Inevitable – Thanks a lot QM!
We try not to wander too far afield into the political end of things. But sometimes you just have to give credit where credit is due and point out some of the obvious consequences of laws affecting lenders, borrowers, default, and legal ramifications. Dodd-Frank and the ensuing Quality Management or QM regime enforced upon the banks has helped lower the default rate. At least some part of that success has come from a ‘baby with the bathwater’ approach. All loans are harder to get! So there are be fewer total loans with the potential to go into default.
Another consequence of QM according to many of the mortgage companies we work with is that they have reduced the total numbers of loan officers but have increased fixed overhead and staffing to make sure they are QM compliant. This expense of originating and underwriting each new loan is no less for ‘small’ loans than for ‘big’ loans. The percentage of overhead to profit is far smaller for big loans. Lenders with associated banks also find ways to make large loans under their professional service departments or other “portfolio” mortgage categories. The oversight and burden of QM onto these types of loans is far lighter. The resulting math is easy – lenders make greater profit on big loans.
Bloomberg reports: “Purchases costing $1 million or more rose 7.8 percent in March from a year earlier, according to data released last week by the National Association of Realtors. Transactions for $250,000 or less, which represent almost two-thirds of the market, plunged 12 percent in the period . . . ” Some of that difference may be related to the fact that million dollar home buyers may have greater cash reserves to use in such purchases as compared with home buyers in modest price ranges. In addition, Dodd-Frank and QM may have driven lenders to seek to service the high end loan market with greater zeal. “Loan applications rose in February for home purchases of $500,000 or more while declining for all other levels, according to the Mortgage Bankers Association. In April, the average loan size for purchases climbed to $280,000, the highest in figures dating to 1990, the trade group said.”
All of this is good news for the high end short sale market where there are more “jumbo” and other loan products and services to support purchasers of expensive but “upside down” properties. Not so good is the news for the home sellers and realtors trying to achieve short sales in modestly priced homes. Buyers in the affordable or starter home market find less enthusiastic lender support and intense competition from investors. Many potential buyers may bide their time on the sidelines and stay content as tenants. Without an abundance of mortgage pre-qualified buyers, Sellers in that market suffer a higher short sale disapproval rate because many times the only offers they receive are from ‘low-balling’ investors. The good news is that prices continue to rise and eventually, the pot of gold at the end of the long time on market for many formerly underwater sellers will be a little bit of equity instead of a little bit of forgiven debt. Maybe this is encouragement enough for homeowners who can, to continue sacrificing and staying current on their mortgages. It may also cause realtors and negotiators to rethink their short sale incremental listing price reduction strategies. Mortgage loan first time defaults are also at the lowest level that we have seen in nearly 7 years and “only one in ten Americans are underwater, down from one in three in 2010 !” This according to Black Knight Financial Services’ latest Mortgage Monitor Report.
But if you are one of the nearly 55% of all defaulting mortgage borrowers who is still on title to your home after TWO! years, it is important to consult with an attorney who specializes in foreclosure prevention to make certain that your rights are protected and you know all of your options for moving on in the long term.