Deep Blue Publications Group: Lending Rules possibly will cut defaults in half

According to an analysis by economists at Goldman Sachs, nearly half of all mortgage defaults from the housing bust might have been prevented by forthcoming consumer-protection regulations, but another 25% of loans that didn’t default might not have been made.

The Goldman analysis attempts to calculate the effect of the forthcoming “qualified mortgage” regulations, these were part of the 2010 Dodd-Frank financial-regulatory repair. The law altered lending rules hence the mortgage lenders will be lawfully responsible for ensuring a borrower can pay back a loan. For writing rules for a “qualified mortgage”, the Consumer Financial Protection Bureau was assigned the task, the rules sates that lenders could make that would automatically satisfy the new ability-to-repay mandate.

Not until next month, the “QM” rules will not take effect. Lenders are allowed from making loans that are not from the QM rules but they could encounter greater legal liability on those loans. Tuesday’s WSJ examined how some banks had come into a decision where they will offer some “non-QM” loans on one occasion that the rules start next year, primarily by making loans to affluent customers that will stay on banks’ balance sheets.

The Goldman study presupposed that whichever loan that wasn’t a QM wouldn’t have been made. Nontraditional loan products are not incorporated from the QM definition, which means loans with interest-only terms, an instance is, which don’t necessitate instant principal payments, wouldn’t qualify.

Loans from between 2005 and 2008, almost 47% of loans that defaulted had at least one product feature that isn’t allowed under the QM rule while nearly 59% of loans created 2007 that entirely defaulted had at least one nontraditional product feature that doesn’t congregate the QM standard.

However the study demonstrates that approximately 25% of mortgages made between 2005 and 2008 that didn’t default might also have been disqualified from the market, including 30% of loans made in 2007.

Loans with those nontraditional product features were focused in the “sand states”. These states had some of the bubbliest housing markets. There were nine out of ten interests only loans in 2006 were in those states, together with almost seven in ten so-called “option” adjustable-rate mortgages. These require low minimum payments before resetting to sharply higher levels.

Adding up to limiting QM to entirely amortizing mortgages, lenders have to show that borrowers’ total debt payments are not exceeding 43% of their pretax income.

The debt-to-income cap could restrain lending for borrowers looking for “jumbo” mortgages that are excessively large for government support and who have uneven incomes or harder-to-document incomes.

“Self-employment income is harder to underwrite than is wage income, and lenders may become incrementally less willing to make loans to such borrowers given new legal obligations,” said the Goldman report. Borrowers that make a noteworthy share of their wages from unstable sources of income, like bonuses, tips, commissions, and investment income, could also stumble upon greater difficulty.