Weekly Wrap: Qualifying what 'QM' means

September 4, 2020 11:10 AM

The Consumer Financial Protection Bureau is proposing several changes to "qualified mortgage" standards, ones which could result in a QM loan in 2021 looking far different from the QM originally conceived through the Dodd-Frank Act in 2010.

Last month, the bureau launched plans to introduce a “seasoned” status to mortgages held by lenders, would provide qualified-mortgage eligibility to a loan based on how long a lender kept it on the books (at least three years). The proposal would bring more loans under Dodd-Frank Act’s QM safe-harbor umbrella – even if they did not meet standard documentation or other hurdles that QM loans today must clear at origination.

The bureau’s position is that loans that have three years of satisfactory history should be considered safe, and their originators deserving of legal QM protections.

That proposal is not sitting well with consumer groups, as reported Wednesday by Kate Berry of American Banker. Those advocates have argued borrowing costs would escalate through riskier loans that bear no consequences for lenders), and say the proposal would undermine consumer protections by introducing time limits to borrower claims against lenders.

The CFPB is already considering other QM changes, such as encouraging lenders’ use of alternative data for ability-to-repay standards, in hopes of broadening market access to fintechs as well as consumer access to credit.

The bureau is also looking to replace the strict 43% debt-to-income standard used to define QM. That approach would factor in a price-based threshold based on the loan's APR to the average prime offer rate (APOR).

The latter was also criticized this week , this time by Edward Pinto, a director of the American Enterprise Institute's Housing Center. Pinto noted in a co-authored comment letter that the such a proposed rate-spread threshold has historically varied "greatly" among loans with similar default occurences. Pinto wrote that the rate-spread between 2013 and 2018 indicated declining market risk in mortgages – or when "DTIs and every major hosuing risk indicator" showed the opposite.

These changes are also combining with along with a possible end to the "QM Patch" exemption for GSEs as early as next January (or April...or October).

Other deals, trends and research in structured finance and asset-backed securities for the week of Aug. 28-Sept.3:

CLOs: Debt loads widen among obligors

S&P Global Ratings reported that credit quality strongly deteriorated across broadly syndicated collateralized loan obligations in the second quarter.

Corporate borrowers either suffered declining revenues or had a drastic ramp-up in leverage as firms sought more capital to ride out the coronavirus pandemic.

As a result, the ratings agency has downgraded 55% of 640 speculative-grade companies with debt held in U.S. CLOs since the COVID-19 outbreak in March. Among those firms, leveraged has increased 1.3x, S&P notes.

“Due to changes in companies’ capital structures (issuance of additional debt and resulting increased leverage, full draw of revolver, etc.), a number of corporate recovery ratings…dropped in the second quarter,” S&P’s report stated.

The proportion of underlying loans in CLO portfolios showed a growing proportion (43%) now have negative outlooks or are on a negative credit watch for downgrades. That compares to 32% at the end of the first-quarter.

Customers exit a DineEquity Inc. Applebee's restaurant in Redwood City, California. Photographer: David Paul Morris/Bloomberg

David Paul Morris/Bloomberg

Whole-business securitization slows to a crawl

Year-to-date issuance of whole-business securitizations by the restaurant and retail sector is down over 70% from the same period a year ago.

According to a report from Deutsche Bank, only $1.9 billiion in deals have been issued in 2020, compared to $6.58 billion through the first eight months of 2019. The year-end volume for franchise-fee securitization was $9.1 billion.

Deal volume this year has been spread across only four issuers: Arby's, Sonic, Driven Brands and a debut issuance by Fat Brands Royalty 1 LLC in March.

The lack of deals is largely cited on investor concerns over how quick-serve restaurants (primarily dine-in) and specialty retailers have fared due to economic constraints on pandemic lockdowns and soaring levels of unemployment.

Arby's transaction in July – it's first whole-biz deal since 2016 – benefited from the parent company's focus on improving take-out and drive-thru food delivery even prior to the outbreak, according to a report from S&P Global.

Other issuers, most notably Applebee's/IHOP and TGI Friday's, have struggled with maintaining primarily dine-in operations hampered by local closings or social-distancing measures that limit seating capacity. The $425 million in asset-backed notes for TGI Friday's outstanding 2017 securitization underwent a third ratings downgrade on Sept. 1.

SFA urges FHFA to revisit GSE capital rule plans

The Structured Finance Association on Monday raised concerns to the Federal Home Finance Agency about its proposed enterprise regulatory capital framework for Fannie Mae and Freddie Mac.

In its letter, the SFA outlined its "overarching" issues with the re-proposed capital rule framework's impact on existing Fannie and Freddie MBS and credit-risk transfer programs of Fannie Mae and Freddie Mac,

The trade group stated in a formal response letter that the new rules would not incorporate a "full-faith and credit guaranty" on legacy and new-issue agency MBS before exiting conservatorship.

"The capital rule assumes resolution and clarity on a number of outstanding policy issues. Unfortunately, such resolution does not exist," the letter states.

The SFA also argued the new capital would would "unnecessarily " penalize CRT programs with a 10% floor on the retained catastrophic risk piece of a credit-risk transfer along with risk weighting and leverage ratio applications that "represent double-counting of mortgage-related assets."

The proposed treatment of CRT "would in all likelihood effectively eliminate the use of CRT by the GSEs," the SFA's letter stated.

Weekly Wrap: Qualifying what 'QM' means

CLOs: Debt loads widen among obligors

Whole-business securitization slows to a crawl

SFA urges FHFA to revisit GSE capital rule plans

Holiday woes for travel industry

On the horizon