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Banks Begin to Pitch Non-Qualified Mortgages as New Rules Set to Go Live

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The New Year is bringing sweeping changes to the mortgage industry.

In just a few days, the Ability to Repay and Qualified Mortgage rules drafted under the Dodd-Frank Act will finally go into effect.

As a result, many mortgage lenders will cease to offer loans that fall outside those rather broad definitions, seeing that such loans might be considered “toxic” going forward.

This means most banks will no longer pitch interest-only home loans, negative amortization loans, balloon mortgages, 40-year mortgages, or loans with DTI ratios above 43%.

Assuming they do continue to offer such loans, they’ll likely have to keep the loans on their own books, and they won’t receive safe harbor in the event of a borrower lawsuit.

You Can Still Get an Interest-Only Home Loan

Still, that hasn’t stopped at least one large bank from pledging to offer non-qualified mortgages.

This morning, Bank of the West announced that it would continue to offer interest-only mortgages, which don’t comply with the Qualified Mortgage rule.

The company said it reviewed the Consumer Financial Protection Bureau (CFPB) rules “extensively” and found them consistent with how it has always approached mortgage underwriting.

Bank of the West believes a well-underwritten interest-only loan may still be a good choice for a borrower, and one that will be safe to hold on the company’s balance sheet.

They added that they’ve been offered for years, and that they meet the needs of certain customers, including the self-employed and those who wish to maximize cash flow.

Though such loans don’t meet the Qualified Mortgage standard, they must satisfy the Ability to Repay rule, meaning Bank of the West will need to ensure the borrower can make monthly payments once the loan adjusts.

Typically, interest-only loans have a 10-year IO period, after which the loan is recast to be paid off during the remaining 20 years of the 30-year term.

This reset can result in substantial payment shock for a homeowner, which explains why the CFPB kept the loans outside the QM definition.

At the same time, these loans don’t build equity directly, and instead rely on home price appreciation to improve a homeowner’s position.

This pretty much sums up why the CFPB doesn’t want banks to offer the loans on a wide-scale basis, seeing that home prices will likely take a dive in the future after the ongoing boom cools once more.

My expectation is that more and more banks will begin offering non-QM loans once the dust settles, though borrowers will be held to the highest standard if they want to obtain such a loan.

After all, banks will actually keep these loans, so they’ll want to know they’re of the utmost quality.

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