QM May Cause Jumbo-Size Hurt

WE’RE HEARING…the qualified mortgage rule is going to hurt the private jumbo loan market.

That’s because the new QM rule (thanks to the Dodd-Frank Act) prohibits interest-only loans and IO jumbos are a popular option.

In high-cost states like California and New York, the 43% loan-to-value ratio that the Consumer Financial Protection Bureau is using as a bright-line test for ability to repay could also take a bite out of the jumbo market.

That's because jumbo borrowers who depend on commissions and bonuses for a large portion of their income might exceed 43% DTI and end up in a non-QM jumbo loan. 

But some are not so pessimistic. Wells Fargo is the largest originator of jumbo loans and its president, chairman and CEO John Stumpf, fielded a question about the QM rule and jumbos during a conference call on WF’s fourth-quarter earnings.

It’s really too early to understand everything that’s in the CFPB’s QM rule, the CEO said. But he stressed that Wells has been in the jumbo mortgage business for a long time.

“In many cases, these are our best customers and we do a lot of things for them. So I doubt, at least I’d be surprised, if whatever happened there would have a big negative impact on the jumbo market,” Stumpf said.

Redwood Trust Inc. also has been in the jumbo business for a long time. In the past two and half years, it has completed 10 prime private-label securitizations totaling $3 billion. Just 12% of those prime jumbo loans are IOs.

“We feel very comfortable buying jumbo loans, including IOs, as long as those loans are made to well-qualified borrowers who can demonstrate their ability to repay,” said Mike McMahon, a managing director at Redwood.  

Interest-only loans got a bad name during the housing boom because they were peddled to the masses as an affordable loan product and it turned out to be massive disaster.

IOs were designed to be a niche product that provides tax advantages for the well-to-do.

Properly underwritten, they perform very well. In two and half years, Redwood has yet to see a 60-day delinquency.

Someday Redwood will have 60-day or 90-day delinquencies, McMahon said. 

But under the CFPB’s rules, it will be hard for borrowers to claim it’s the lenders fault, if they have demonstrated a pattern of making their payments.

MONEY CHANGES EVERYTHING: We thought about Cyndi Lauper’s 1980s rocker by this name when we saw that she is teaming up with the Department of Housing and Urban Development on a public service announcement (the news courtesy of our friends Frank and Brian from Think Big, Work Small). Cyndi’s best known for her song “Girls Just Want to Have Fun” but with the deficit and the debt it’s all about the dough-re-mi these days. Check out the TBWS video and also, for you mortgage vets, here’s Cyndi’s money video from back in the day. Not true, by the way, that HUD was named after the Paul Newman movie.

MOST RELEVANT: Ted Cornwell’s What We’re Hearing blog Monday on appraisal management companies got the most comments from readers for the week. Garth Graham’s WWH blog Wednesday on using net amounts rather than gross for figuring DTIs came in second. Good continuity for Garth. This week he wrote about gross, last week he wrote about puke! And next week he’ll write about subprime. (Only kidding!) As for the AMC blog, it was also the most-read story on the site this past week. Those AMCs continue to generate a lot of light and heat, don’t they? Some people think they are the worst thing since sliced bread. Others think they’re just in it to make money for themselves. Hey, last time we checked, that’s what all for-profit businesses are in it for!

OUR VIRTUAL FRIENDS: Many of our posters on mortgagegrapevine.com know each other only through the Internet, so news of a big sports star getting hoaxed by a nonexistent electronic girlfriend predictably gave our virtual friends a chance to go to sarcastic town. We love our Grapeviners, real or imaginary, so count us in with the poster who sent this romantic comment to all his Internet pals: “You complete me.”

KILLING TREES: Want to see what the new qualified mortgage rule looks like? No, we don’t mean what’s in it, but what it looks like in paper. Lots of paper! A video by the National Association of Mortgage Brokers gives you a visual aid to see just how much paper it takes to spell out the QM.

SHOUT OUT: You get a mention in this blog if you do more than ten net new hires to help us work our way out of a tepid housing (and national) recovery. This week’s shout out goes to Churchill Mortgage of Brentwood, Tenn, which added nearly 80 employees during 2012. Last year was a good one for Churchill, with more than $1 billion in mortgages originated through 6,000 loans. That’s the first time Churchill has hit the magic $1 billion figure. Way to go!

Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.