US RMBS: Is non-QM the new sub-prime?
The US private label RMBS market is set to surge if Fannie and Freddie stop guaranteeing higher debt-to-income mortgages in 2021, but eager investors should approach the sector with care.
Since 2014, home loans in the US have fallen into two categories: qualifying (QM) and non-qualifying (non-QM).
The Consumer Financial Protection Bureau (CFPB) introduced the concept of the former as part of the Home Mortgage Disclosure Act, which was designed to reduce risky practices in the market. The QM designation involved a variety of metrics, most notably a debt-to-income ratio of less than 43%.
The Act inevitably spawned the non-QM mortgage sector, targeted at those that fall outside those strict QM specifications.
The non-QM definition is very broad but tends to incorporate four types of borrower: the self-employed, those borrowing for investment properties, those with a debt-to-income (DTI) of more than 43% and loans to foreign nationals.
But there is one enormous exception to this: under current rules, any mortgage that is backed by either of the government sponsored enterprises (GSEs) ‒ Fannie Mae or Freddie Mac ‒ automatically qualifies as a QM loan regardless of whether it falls into any of these non-QM categories, under an arrangement known as a 'patch'.
The GSEs currently guarantee a total of $4.5 trillion in residential mortgage loans and, according to KBRA, are now purchasing more than $150 billion mortgage originations per year that comprise loans with a DTI greater than 43%.