Starting with January 2010, federal rules for QM loans have caused changes in lender’s policies and overall objectives on the financial market. The reality of our times is that people need loans to buy a property, and while some people qualify for advantageous loans, others don’t. Yet, lenders try to get the opportunities of every market sector. Hence, in addition to qualified mortgages (QM), financial institutions now provide non-QM loans for borrowers who don’t meet the criteria for loans in the first category.
Although non-qualified mortgages are more costly to obtain, not to mention that they keep you on your toes during the application approval period, borrowers can benefit from advantageous conditions that miss from QM packages.
The loans division at Wells Fargo Bank
Even if for quite a long time, Wells Fargo have passed their non-QM loan files to other financial entities like Freddie Mac or Fannie Mae, the bank is now taking a new approach to their loans program. Wells Fargo now includes a new division dedicated to issuing non-conforming loans.
Senior Wells Fargo Executive, Brad Blackwell declared for Bloomberg News that 25% of the bank’s mortgage loans could be non-QM mortgages. And to push the percentages even further, this amount represents 5% of all the mortgages issued by Wells Fargo. While it is common on the U.S. financial market for banks to sell loans to investors after originating them, Wells Fargo intends to keep these mortgages in its portfolio.
Similar reports come from other major U.S. banks such as Bank of the West who have confirmed the intention of issuing non-QM mortgages that will be kept on the bank’s books. Changes at Citibank are also expected with the modifications brought to the non-QM mortgages.
The big issue of affordability
Mortgages must be affordable, this is the number one rule of QM. Borrowers are thus protected against feature loans that could make them unaffordable. The big crash of the real estate market and financial sector is partly a consequence of mortgages with “poisonous” features.
Here is what a qualified loan should NOT be! It should not include hazardous features such as negative amortization, balloon payments and interest-only features. The loan cannot extend for longer than 30 years. The loan expenses (fees and points) should be up to 3% of the loan amount, at the maximum. However, if you borrow less than $100,000, the lender may set higher limits. Paradoxically, the less you borrow, the higher the fees.
Lenders are the main beneficiaries of the QM advantages because they now have better protection against foreclosure. You should be very careful what kind of mortgage you buy, because the new regulations don’t let you cry over spilled milk and get it back in the bottle. This means that you cannot sue the lender for selling you an unaffordable loan. The good part for the borrower is that, given these facilities, lenders now provide lower rates for the QM packages.
Although the QM market is safer, lenders will fight to get the bone on the non-QM home loans market as well. There are individuals who understand the risks of non-QM mortgages and they are willing to take them, in order not to tie their money to a residence. The target buyers for interest-only mortgages consists usually of high net worth individuals. Borrowers with bad credit score may also apply for a non-QM loan, but they will take more money out of their pocket for loan fees (more than 3% of the loan amount).