Category: Structured Finance
Last week's stories
Canadian CRT in the wings
Canadian bank said to ready CRT
Greek banks eye CRTs to tackle NPLs (Premium Content)
Hayfin answers SCI's questions
Decline in loan removal from forbearance suggests large unknowns ahead
UK RMBS transition risks highlighted
UK RMBS market update
New seasoned QM category could open door to increased MBS
On December 10, the Consumer Finance Protection Bureau (CFPB) issued the final rule for the criteria which define a Qualified Mortgage, and the introduction of an innovative seasoned loan category could provide a route for increased lending and greater MBS issuance, say market observers.
Under the new ruling, mortgages which do not initially meet the qualification benchmarks for QMs may become a QM if, over a 36-month period, they demonstrate the capacity for full and timely repayment. The loan must not have been delinquent for more than two 30-day periods and cannot have been delinquent for more than 60 days in the previous 36 months.
But there are exceptions. For example, if the loan is considered to have become delinquent due to a disaster or pandemic-related national emergency, then the borrower may be allowed an accommodation and his or her loan still considered a QM.
To be eligible to become a seasoned QM, a loan must be a first-lien, fixed-rate loan with no balloon payments and must meet certain other product restrictions. "This seasoned QM Final Rule will ensure access to responsible, affordable credit in the mortgage market through responsible innovation," says CFPB director Kathleen Kraninger.
"The big unknown is the seasoned QM status. This is a new category which has been carved out and which has the potential for growth. If people have a lot of seasoned loans they are looking to get off their books through securitization, this gives them an avenue," says Timothy Willis, an md and head of the governance and controls practice at RiskSpan, the data analysis and risk consultancy firm.
Moreover, the abolition of Appendix Q will perhaps increase ease of access to mortgage credit to a wider range of borrowers, thus increasing the pool of assets for the MBS market. The original ruling that defined QMs, as part of the Dodd-Frank legislation conceived in the aftermath of the financial crisis of 2008/2009, stipulated a wide range of detailed documentary evidence the creditor had to gather from the borrower before QM status was granted, known as Appendix Q.
This ruling tended to discriminate against those in self-employment or part of what has become called the gig economy, and also those who are asset rich but income poor. "Appendix Q was outdated and had lots of holes. It was stifling for many borrowers and prevented consideration of many types of stable income," says Kris Kully, a partner in Mayer Brown's Washington DC office.
Replacing Appendix Q is the new Regulation Z, which throws the onus for determination of capacity to repay upon the creditor. The latter must now "consider and verify" loan underwriting requirements. This means the borrower's assets and expected income should be assessed and verified, but it is not nearly as prescriptive as the former ruling.
So, once again, this could open the door to increased lending. Additionally, MBS deals which incorporate only QM loans are exempt from risk retention rules. This would be an incentive to greater issuance. "There could be greater creativity and variability in the types of loan that are included in MBS deals which are exempt from risk retention rules," suggests Kully.
One of the central platforms of the new rules is the removal of the so-called GSE Patch. This allowed all loans that were sold to Fannie Mae and Freddie Mac to be considered QM whether or not they satisfied the criteria for QM status that applied to private label bonds. From now on, all mortgages will considered alike, whether or not they are sold to a GSE or not. From June 30, all loans sold to the GSEs will be subject to the general QM rule.
"My sense is that if I were a regulator my concern with the Patch was that it basically outsourced responsibility for confirming what a QM is and just said 'whatever Fannie and Freddie say, that's good.' The CFPB has got out from under that," says Willis.
The great advantage of QM qualification is that it provides a shelter for the creditor against possible legal action by borrower for non-compliance. In the febrile post-crisis climate, with legal suits for unfair selling abounding, this was an important consideration for lenders.
Hand in hand with the elimination of the GSE Patch is the replacement of the 43% debt-to-income (DTI) ratio established in the 2010 rules and its replacement by a pricing criterion. Hitherto, a mortgage with an annual percentage rate (APR) of 225bp or less over the average prime offer rate (APOR) meets the threshold for QM status. This is the level beyond which loan performance deteriorates, according to ample statistical research conducted by the CFPB.
The substitution of the DTI ratio qualification with the pricing qualification addresses the concern that the removal of the GSE Patch would mean reduced availability of mortgage credit as the GSEs buy loans in which the DTIs are above 43%. Some of these loans may have an APR of less than 225bp over APOR and so will now qualify as QMs.
Of course, new White House administration might extend the GSE Patch beyond the slated June 30 expiration. The incoming government is perhaps less likely to want to reduce the role of the GSEs in the US mortgage market and create a level playing field - but this remains to be seen.
Other deal-related news
- MS Amlin Underwriting has launched Phoenix 1 Re, the first locally issued ILS to provide capacity to a local cedant, solely focused on the Pan-Asia region (SCI 11 January).
- AFME has called on market participants to actively transition as many transactions as possible to identify and reduce the stock of legacy securitisations well in advance of the cessation of Libor at end-2021 (SCI 11 January).
- KBRA recently reviewed appraisal reduction amounts (ARAs) across the US CMBS 2.0 conduit universe and found that 409 ARAs were effectuated year-to-date through November 2020, versus 111 in full-year 2019 (SCI 11 January).
- The EIB Group and BNP Paribas have executed a synthetic securitisation to support French SMEs and mid-caps hit by the coronavirus fallout (SCI 11 January).
- Argentic Real Estate Finance has transferred its horizontal risk retention interests in 13 previously issued US CMBS into 14 newly formed trusts that are majority-owned affiliates (SCI 12 January).
- DFG Investment Advisers has changed its name to Vibrant Capital Partners, unifying the firm with its CLO business and several of its investment vehicles, which have operated under the Vibrant brand since 2012 (SCI 12 January).
- RCB Fund Services, the distribution agent for the ICP Asset Management Fair Fund, has opened the claims process for the fund (SCI 12 January).
- Lloyd's has established London Bridge Risk PCC, the first UK ILS structure to be approved by the PRA for use for multiple, market-wide transactions for Lloyd's members (SCI 14 January).
- Blackstone Private Credit Fund (BCRED) - Blackstone's non-listed BDC - has broken escrow with approximately US$814m in net proceeds for its continuous public offering (SCI 14 January).
- illimity Bank has finalised two non-performing loan transactions, including the sale to Phinance Partners and SOREC involving a €129m GBV portfolio related to around 4,500 debtors (SCI 15 January).
- The FHFA and the US Treasury have amended the GSE preferred stock purchase agreements (PSPAs) to allow Fannie Mae and Freddie Mac to continue to retain earnings until they satisfy the requirements of the 2020 Enterprise capital rule (SCI 15 January).
Company and people moves
- Onex Corporation has acquired Falcon Investment Advisors, with the aim of expanding its credit platform and solidifying its market position in tradeable, opportunistic and private credit (SCI 11 January).
- US Bank is set to purchase the debt servicing and securities custody services client portfolio of MUFG Union Bank (SCI 11 January).
- The European Leveraged Finance Association has appointed Sabrina Fox as its first ceo (SCI 11 January).
- Juan Carlos Martorell is now responsible for origination, structuring and distribution of securitisations and risk transfer at Munich Re (SCI 11 January).
- Onex Credit has recruited Conor Daly to lead its European CLO platform, beginning in April 2021 (SCI 11 January).
- Harry Noutsos has joined PCS as md within its outreach team (SCI 11 January).
- Rabobank has promoted Serdar Özdemir from executive director to head of structured asset distribution - portfolio management (SCI 11 January).
- Cadwalader has promoted seven attorneys to special counsel, including Alexander Collins and Kevin Sholette respectively of the firm's capital markets and real estate practices (SCI 11 January).
- PACE originator Renovate America last month filed for Chapter 11 bankruptcy, as a result of coronavirus economic disruption, underwriting legislation passed in California in 2018 and lawsuits filed against the company (SCI 11 January).
- Simon Mullaly has joined Guggenheim Securities as md, to expand its fixed income credit trading capabilities (SCI 11 January).
- European DataWarehouse has submitted an application to become a securitisation repository in the UK registered and supervised by the FCA (SCI 11 January).
- Ocwen Financial Corporation has issued a statement expressing its disappointment that settlement discussions with the CFPB have not been resolved (SCI 12 January).
- dv01 has acquired Pragmic Technologies, an early-stage company focused on the data infrastructure of the agency MBS market (SCI 12 January).
- Kartesia has created a full-time CSR & ESG position, to be filled by Coralie De Maesschalck, who has been head of portfolio and ESG at the firm since 2015 (SCI 12 January).
- Tikehau Capital has hired Laura Scolan as head of France and coo within its private debt strategy (SCI 12 January).
- SoFi is set to go public by merging with a SPAC, Social Capital Hedosophia Holdings Corp V, which is run by Social Capital founder Chamath Palihapitiya (SCI 12 January).
- Nassau has received an initial strategic investment of US$100m from Wilton Reassurance Company and Stone Point Credit (SCI 12 January).
- A pair of property finance executives, backed by funds managed by Oaktree Capital Management, have launched Silbury Finance - a platform providing bespoke senior development finance solutions for the structurally undersupplied UK residential, retirement and student accommodation sectors (SCI 14 January).
- Intermediate Capital Group has appointed Philippe Arbour as md, Senior Debt Partners, which is one of its flagship strategies (SCI 14 January).
- Scope has appointed Guillaume Jolivet as coo, responsible for the rating agency's analytical activities and governance, including compliance and internal audit for Scope's subsidiaries (SCI 14 January).
- Reed Smith has promoted 31 associates and counsel to partner, including two with structured finance experience (SCI 14 January).
- Damien Dwin has launched Lafayette Square, an impact-driven minority owned investment platform (SCI 14 January).
- Michael Zampetti, md, has joined Greystone's commercial finance team in New York (SCI 14 January).
- Home Point Capital has appointed Andrew Bon Salle as its chairman (SCI 14 January).
- Natixis has named Emmanuel Issanchou head of global markets Americas and global head of credit markets (SCI 14 January).
- Pollen Street has recruited Daniel Khouri to lead its team in New York, advancing the firm's credit strategy to develop partnerships with best-in-class specialists in the non-bank lending sector to provide capital and strategic insight (SCI 14 January).
- Former Magnetar Capital fixed income strategist Tom Rutledge has co-founded a rideshare firm called Wapanda (SCI 14 January).
- Luxembourg-based MC Invest has added Daniel Clarke and Tom Sterling as mds, as well as John Aldershot, Jamie Stratton and Peter Northwood as directors in its MBS and rates division (SCI 15 January).
- TIG Advisors has acquired a minority revenue share interest in Arkkan Capital, a Hong Kong-based alternative asset manager with approximately US$1bn of assets under management, from a fund managed by a Blackstone advisor (SCI 15 January).
- Elementum Advisors has hired Todor Todorov as vp, business development & investor relations (SCI 15 January).
SCI's 2nd Annual Middle Market CLO Seminar
25 February 2021, Virtual Event
SCI's 5th Annual Risk Transfer & Synthetics Seminar
March 2021, Virtual Event
SCI's 3rd Annual NPL Securitisation Seminar
May 2021, Virtual Event