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Credit Effect on Non-Agency Mortgages

The argument whether enhanced regulatory oversight by the Consumer Financial Protection Bureau (CFPB) has a significant impact on the supply of credit or on bank-risk taking is a critical topic. With regulatory efforts strengthening across the street, one might assume that the non-agency lending business has been negatively impacted. However, studies from reports showcase that CFPB oversight has at most a small negative effect on overall mortgage lending. According to the research done, an increase in regulatory effort creates an environment where banks decrease origination for riskier loans. That might be the case for riskier loans, but non-qualified mortgage loans are not necessarily considered risky.

The non-qualified mortgage loans of today are nothing like the subprime loans of yesterday. Even with non-QM loans, a lender must follow all requirements and validate the borrower’s “ability-to-repay”. This would mean vetting all the applicants with employment, income and asset verification similar to that of agency loans. Non-QM loans are not as risky because lenders offset some of the risk by charging higher rates and fees as long as they can demonstrate the consumer’s “ability-to-repay” debt. Jumbo mortgages are also affected by an increase in regulatory burden because they fall outside of the QM rule standards and thus don’t fall under the safe harbor, making lenders reluctant to originate them. After examining the regressions, applicant denials and graphical evidence from reports, it is clearly evident that the CFPB oversight has affected the composition and riskiness of bank lending.

Keith Knutsson suggests "The 'pendulum' has swayed too far to the radical side of regulation. This has left a gap in the market where worthy loans have been widely ignored by the institutions. Thus proving that heavy regulations have been more of a burden, than a benefit, in the non-QM lending business. This neglect in the industry has created an opportunity for institutions to capitalize on what would normally be healthy loans."

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