Economists' Outlook

Housing stats and analysis from NAR's research experts.

Reach of New Risky Loans Still Modest

Despite reports of a rise in non-QM lending, participants in NAR’s 1st quarter Survey of Mortgage Originators indicated that the non-QM share of the market was anemic. While the non-QM market shrank the share of loans that fall under the “rebuttable presumption” rose modestly. As originators retool in the wake of a declining refinance market, analysts will monitor the market for signs of increased risk taking.

The Dodd-Frank regulations created the Ability to Repay (ATR) rule in which a lender must prove or verify a borrower’s ability to repay their mortgage. Lenders argued that doing so might prove difficult and costly in court, so lenders were granted two levels of legal protection or assumed compliance with the ATR. The first known as the Qualified Mortgage (QM) rule provides the highest level of protection to lenders. Among other things, the QM rule requires originators to verify incomes, limits the fees that a lender can charge, sets a maximum back-end debt-to-income ratio of 43 percent, and prohibits certain loans products like interest-only loans, negative amortization loans, or amortizations longer than 30 years.

A second category of loans, dubbed “rebuttable presumption”, is less safe for lenders. A rebuttable presumption mortgage is the same as the standard QM, but allows for the rate charged by lenders to be as much as 150 basis points above the average prime offer rate (APOR). When a loan has a risk factor like a low down payment or low credit score, the lender will increase the rate to compensate for that risk. By capping how much they can add to the rate, regulators hoped to reduce how much risk lenders would take-on.


In the 1st quarter of 2017, the share of non-QM lending fell to 0.1 percent from 1.0 percent in the 4th quarter. Nearly 56 percent of respondents in the survey offered non-QM loans, but as depicted below by a net decline of 10.6 percent lenders grew less willing to extend these loans in the 1st quarter, wiping out the gains from the 4th quarter. Willingness to extend rebuttable presumption credit also moderated in the 1st quarter, but the share of originations that were rebuttable presumption rose to 8.4 percent.


The bulk of risky loans originated from 2001 to 2006, were sold to investors through private label mortgage backed securities. While non-banks in this survey originate more of the total market for non-QM loans, on an individual lender basis portfolio lenders have a higher weighted average share at 0.7 percent compared to 0.1 percent for non-bank lenders. The CFPB has argued that lenders who hold risky loans in portfolio are directly incented to maintain strong underwriting, to use compensating factors to reduce risk, and to maintain robust capital levels…all factors that declined during the run-up to the last crisis.


While the share of risky loans rose modestly in the 4th quarter of last year, that trend appears to have retrenched in the 1st quarter of 2017. However, as refinance-oriented lenders retool their operations towards the purchase market due to rising rates they may be enticed by profits in riskier loans. Consequently, this trend should be monitored and evaluated alongside potential changes to the QM rule as the market shifts closer to its historic “norm” of modestly higher default rates and looser lending standards.