A new report from CoreLogic claims that under the new Qualified Mortgage rules, half of the loans made in 2010 wouldn’t qualify.
But CoreLogic neglects to mention a very, very important piece of information, and that has led to a bit of hyperbole from the media that’s picked up the story.
Here’s the offending sentence, from CoreLogic’s February 2013 MarketPulse newsletter. Sam Kahter wrote:
It is estimated that only 52 percent of originations will meet the eligibility requirements of the QM rule’s safe harbor.
That tidbit was turned into headlines such as HousingWire’s “Only half of today’s mortgage originations meet QM requirements” and DSNews’s “CoreLogic: QM, QRM Rules Remove 60% of Loans, but 90% of the Risk.”
Wow. Thanks to QM, half of all loans will be denied!
Um… no.
Don’t miss the detail
The key, you see, is in the last part of that CoreLogic quote: “the eligibility requirements of the QM rule’s safe harbor.”
There are two standards of QM loans as defined by the Consumer Financial Protection Bureau: prime and subprime.
Subprime QM loans give lenders the same protections they have today — that is, a borrower can sue if he defaults and thinks the lender shouldn’t have given him a loan in the first place.
But a new standard, prime QM loans, give lenders extra protection — “safe harbor” from such suits, if the loan meets stricter requirements.
What CoreLogic found was that 48 percent of today’s loans wouldn’t meet the stricter standards that guarantee safe harbor for lenders. They would still qualify, if the lenders were willing to take the same risks that they take today.
It’s possible that some lenders will refuse to make loans that don’t meet those stricter standards. But they still can make sub-prime loans, and would have no more risk than they have today. So suggesting that almost half of all loans wouldn’t qualify at all is a bit misleading.
Here’s an analogy
Imagine the government makes a new rule: For every car a dealer sells that gets 50 MPG or more, he gets a $10,000 tax credit. Suddenly news stories come out, “75% of today’s cars wouldn’t meet new government standards!”
That’s slightly misleading. Maybe 75% of cars wouldn’t make the dealer eligible for that bonus, but they would still be sellable.
Same idea here. Maybe 48 percent of loans wouldn’t be eligible for the safe harbor ‘bonus,’ but they would still be qualified. Dealers may prefer to sell 50+ MPG cars, but that doesn’t mean they can’t sell others.
Finally, a translation
The bottom line is that this sentence:
It is estimated that only 52 percent of originations will meet the eligibility requirements of the QM rule’s safe harbor.
Should be read as:
It is estimated that only 52 percent of originations will qualify lenders for the extra protection to be offered under the safe harbor provision.
Then again, that doesn’t lead to headlines nearly as interesting.
