DBRS Releases Commentary on U.S. Residential Mortgage Origination and Servicing Mid-Year Review and 2019 Outlook

DBRS, Inc. (DBRS) released a commentary titled “U.S. Residential Mortgage Origination and Servicing Mid-Year Review and 2019 Outlook,” which discusses origination and servicing trends, loan performance and expectations for the remainder of 2019. According to Kathleen Tillwitz, Managing Director of Operational Risk at DBRS, “Home prices have continued to rise in 2019 and delinquency and foreclosure rates stayed at their lowest levels in years. Delinquency trends are projected to remain flat as successful modification plans continue and foreclosure rates remain low.” DBRS also believes that the number of real estate-owned properties that will be taken back by lenders in 2019 will continue to decline as the number of foreclosure starts continues to trend downward from their peak.

“DBRS observed both the loosening and tightening of certain underwriting guidelines for some non-conforming prime programs over the last year,” states Tillwitz. Changes include minimum FICO score requirements reducing to 620 from 640, maximum loan-to-value (LTV) ratios decreasing to 90% from 95% and required reserves lowering to a range of three to 12 months from an average of six to 18 months. In addition to these changes, DBRS noticed that lenders are more tolerant of borrowers with previous credit events, such as a prior mortgage delinquency, and shortened time periods for the discharge of a bankruptcy, deeds in lieu and short sales. “In an effort to increase affordability, DBRS believes that the U.S. market will continue to see more lenders widening certain aspects of the credit box throughout 2019,” adds Tillwitz.

Despite a slow start, eMortgages are gaining momentum. Currently, 38 states and the District of Columbia have laws recognizing the legality of eNotarization and 22 of these states have laws recognizing the use of remote notaries who are not physically present at closing. DBRS expects industry adoption of eMortgages to accelerate in 2019 as mortgage originators, key secondary-market participants, technology solutions providers, mortgage servicers and land record jurisdictions continue to build the required infrastructure and update processes.

DBRS believes that the declining refinance opportunities, coupled with increasing home prices and inventory shortage, will result in the continued increase of non-Qualified Mortgage (QM) loans in 2019 as more lenders expand their loan offerings to include products outside the QM space. While most non-QM lenders are targeting borrowers with high FICO scores (typically 700 and above), low LTV ratios (generally below 80%) and a certain amount of liquid reserves, “DBRS observed some non-prime programs introduced over the last year with FICO scores as low as 500, which were acceptable when coupled with certain other criteria, such as no prior bankruptcy or foreclosure in the last four to seven years,” Tillwitz states. DBRS believes that, throughout 2019, the industry will see more lenders offering non-QM loans.

The Consumer Financial Protection Bureau (CFPB) issued an Advance Notice of Proposed Rulemaking (ANPR) on July 25, 2019, seeking information relating to the expiration of the government-sponsored entity (GSE) patch. The ANPR states that the CFPB currently plans to allow the GSE patch to expire as scheduled in January 2021 or possibly after a short extension to facilitate a smooth and orderly mortgage market transition. Tillwitz states, “DBRS believes that the issuance of the Qualified Mortgage Rules has brought much-needed reform to the mortgage industry by setting underwriting standards that ensure lenders only make loans to borrowers who have a reasonable ability to repay them.” The CFPB announced the expiration of the GSE patch as well as the possibility of some welcome revisions to Regulation Z’s definition of QM, which might allow it to be less stringent. “These changes are viewed positively by the secondary market as they may lead to increased private-label issuance,” concludes Tillwitz.

Notes:
A copy of this commentary is available by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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