Why the Government Needs You to Make Non-QM Loans


Fannie Mae and Freddie Mac may be too profitable to shut down just yet, but that hasn’t slowed down bipartisan support for ending the conservatorship. After all, even politicians understand that a $14 trillion mortgage market [1] can’t survive without private cash.

There are several reasons why creditors should consider lending outside Dodd-Frank’s Qualified Mortgage (QM) rule, a set of stipulations that require creditors to make a “good faith determination” of a consumer’s ability to repay using a completely arbitrary debt-to-income ratio of 43%. Perhaps the noblest reason is that non-QM loan origination is good for the economy and essential for the overall health of the mortgage market. Perhaps the most compelling reason for creditors to re-enter the non-QM space is that the government really want them to originate these loans. Lawmakers just don’t know how to promote it yet.

Creditors also want to enter the non-QM space – a market currently valued at $2 trillion and expected to rise in the next few years – but are concerned about liabilities stemming from Dodd-Frank’s ability-to-repay guidelines (that’s where the 43% rule comes into play). At the same time, governments are eager to wind down the conservatorship and have proposed several policy tools for doing so, including increasing GSE g-fees, cutting down conforming loan limits and introducing a 10% down payment requirement on mortgages insured by Fannie and Freddie. These policy levers came straight from the horse’s mouth and were laid out by Freddie Mac in an investor presentation back in November. This clearly shows that lawmakers see the need for urgency in phasing out one of their biggest GSEs.

While the Obama administration’s window for winding down Fannie and Freddie appears to have closed, House Democrats did introduce new reform measures in 2014 that would break apart and sell the conservatorship. The reason nothing new has come out of Washington is that nobody seems to agree on what to do with Fannie and Freddie. Should they be allowed to recapitalize and become publicly-traded companies or should lawmakers do away with them for good? Whatever the correct answer might be, lawmakers appear to have more pressing concerns at the moment than overhauling the housing finance system. The likes of William Ackman, Carl Icahn, Bruce Berkowitz and Richard Perry would vehemently disagree with that assertion. This so-called Gang of Four is pulling out all of the stops to rescue Fannie and Freddie in order to tap into $33 billion-worth of preferred shares at stake. [2]

Or perhaps the government wants to be repaid several times over for bailing out Fannie and Freddie to the tune of $187.5 billion in 2008. Companies that are considered too big to fail aren’t just going to be shut down or phased out when they’re making money, despite overwhelming market fundamentals indicating that the securitization process should be restarted sooner rather than later. (For starters, don’t count on healthy inflation without non-QM lending.) Besides, if “Jumpstart GSE Reform” – the 2015 amendment headed by Republican Senator Bob Corker – is the best the government can do, perhaps it’s best for Fannie and Freddie to remain in legislative limbo for now. Neither Democrat nor Republican would actually admit to that, but they’re both feasting on the proceeds of the conservatorship as we speak. After all, large dividends checks to the Treasury are good at a time when the nation is sporting a federal debt of about $18 trillion.

The Jumpstart provision called for big structural changes to housing finance reform, including prohibiting the sale of Treasury-owned senior preferred shares in Fannie Mae and Freddie Mac without approval from Congress. [3]

As it now stands, the GSEs are undercapitalized, which means taxpayers would be left to pick up the mess if Fannie and Freddie are cut loose and forced to fend for themselves in a shaky economy. While both Republicans and Democrats recognize that the best way forward is through reform, investors shouldn’t hold their collective breath that anything transpires anytime soon.

This shouldn’t discourage creditors from entering the non-QM market. Lawmakers on both sides of the political divide are clearly looking for ways to open up the securitization market, but due to a combination of factors haven’t been able to move the agenda forward. It’s hard to believe any major reform will occur in the next six months as the GOP implodes at the sight of Donald Trump winning state after state in the primaries.

For creditors, the risks of non-QM loan originations remain relatively small. Borrowers with high FICO scores making big down payments on residential property hardly constitutes subprime lending, regardless of the 43% rule. And because it’s non-QM, lenders can make more money in the process – up to 250 basis points more according to some estimates. This is a highly attractive and potentially lucrative avenue for creditors looking to boost originations in a market that still contains a lot of soft patches.

[1] Board of Governors of the Federal Reserve System. Mortgage Debt Outstanding (December 2015).

[2] Amy Poster (February 11, 2015). “Fannie Mae and Freddie Mac: Wind-down or Reprieve?” Institutional Investor

[3] United States Senator Bob Corker (December 16, 2015). “Corker, Warner Applaud Inclusion of Jumpstart GSE Reform Provision in Omnibus.”

This article was written exclusively for GoRion.

(Visited 4 times, 1 visits today)



This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

Read more articles from

Leave a Reply

Your email address will not be published. Required fields are marked *