Trying No-Go Mortgages


Cautiously and sparingly, only a few tread non-Qualified Mortgage ground

By Howard Schneider

Under the right circumstances, providing residential mortgages that fall outside of the new federal Qualified Mortgage definition could help a community bank grow its lending, some community bankers say. Done carefully, originating so-called non-QM loans could give some community banks greater underwriting leeway to serve more homebuyers.

Typically, community banks engaging in non-QM lending today hold mortgages they’ve originated and are confident in their ability to maintain strong underwriting. “If you’re taking all the risk, you’re going to have stringent underwriting,” explains Thomas Lindow, president of Time Federal Savings Bank in Medford, Wis., a $613 million-asset community bank serving central and northern Wisconsin that engages in non-QM lending.

Last year Time Federal originated around 500 mortgages, but in previous years it produced up to 800 home loans. One-third of the bank’s mortgage originations over the past 18 months have involved balloon mortgages, explains Jeff Mueller, the bank’s senior vice president of lending. The bank offers 15-year fixed-rate mortgages and 15-year balloon loans set up to amortize over three decades. It also gives existing borrowers the same rate on vacation properties as that which is available for primary residences.

“If you’re taking all the risk, you’re going to have stringent underwriting.”
—Thomas Lindow, Time Federal Savings Bank

“Very competitive” rates and closing costs plus in-house servicing are bringing the bank word-of-mouth mortgage business, Mueller explains.

Although Time Federal is following its traditional underwriting standards, Lindow acknowledges that discovering how examiners will view their portfolio in light of the new regulations is “a big question.” Documenting every borrower’s income according to the federal Ability-To-Repay standards would require the bank to set up new mortgage lending procedures, which its executives don’t feel is necessary.

“We’ve always looked at ability to repay,” notes Mueller, adding that the bank has a centralized underwriting system.

Still holding back

However, most community banks remain cautious and reserved in their non-QM lending, surveys have shown. A 2014 survey by the Federal Reserve and the Conference of State Bank Supervisors found that about one in four community banks originates non-QM home loans, to one degree or another. But close to another 40 percent of community banks make non-QM loans on an exception basis, the Federal Reserve survey notes. Most community banks said that non-QM lending comprises 10 percent or less of their mortgage originations.Balloon payments also are a common feature of community bank non-QM loans, according to the Fed’s survey.

An ICBA member survey last year showed similar results.

“There’s a lot of concern and uncertainty,” says Ron Haynie, ICBA’s senior vice president of mortgage finance policy. That uncertainty, he explains, derives from the ramifications of originating home loans that don’t have the highest legal protections from federal statutes and regulations.

America’s mortgage industry is also “very cautious” across the board, Haynie adds, due to higher origination costs and increased regulatory and investor scrutiny. “Lenders can’t afford to make a mistake,” he says. More conservative mortgages are a result of the new federal mortgage lending standards and definitions.

Solid standards

Underwriting also hasn’t changed at Geddes Federal Savings & Loan Association, a high-volume mortgage lender in Syracuse, N.Y., because of limitations from QM qualifications, says Brian DuMond, the bank’s CEO. Although mortgage lending is a major component of the $530 million-asset bank’s lending, the bank originates just a few non-QM mortgages a month.

Yet issuing even a few non-QM mortgages—all of which are held in portfolio by Geddes Federal—still gives the bank an advantage over its competitors that avoid non-QM mortgages altogether, DuMond says. “We wouldn’t be serving the needs of our community” if the bank wasn’t providing non-QM home loans, he adds.

Geddes Federal’s mortgages that fall in either the QM or the non-QM category are generally treated the same for underwriting purposes. That’s because the bank is confident that the underwriting policies and procedures it applies to originate mortgages are strong, DuMond says. Mortgages granted underwriting exceptions are tracked separately, he adds, noting that bank examiners are comfortable with the lending standards. The bank’s loan losses remain “quite low,” DuMond points out. “If [a mortgage application] meets our standards, we approve it,” he says of every mortgage the bank issues.

ICBA Member Survey
On Non-QM Lending

Does your community bank provide mortgage loans that are not Qualified Mortgage loans under the Consumer Financial Protection Bureau’s definition?

44% – No
25% – Yes
22% – Only in special cases
9% – Not sure

Source: ICBA Community Bank Lending Survey, 2014

Geddes Federal typically moves into non-QM territory by allowing debt-to-income ratios that reach 45 percent, over the allowable QM threshold. Yet the bank also requires a minimum 620 credit score and at least a 10 percent down payment for mortgages. Factors such as savings, steady employment, a large down payment or a high credit score can compensate for a borrower’s elevated debt-to-income ratio.

Many of Geddes Federal’s non-QM borrowers are first-time homebuyers, points out its vice president of lending, Laurie O’Hara. “There are plenty of good customers out there, and they deserve a chance,” she says.

O’Hara adds that the bank reduces its legal and regulatory risk on non-QM loans because its underwriting practices “are tried and true for us.”

Yet many community banks remain concerned about how regulators might view non-QM loans. One possibility to help more community banks issue non-QM loans, Haynie suggests, is to run those loan applications through Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector. That’s because currently the Consumer Financial Protection Bureau grants QM status to loans approved by these automated underwriting systems. Yet lenders using Freddie Mac’s underwriting software aren’t obligated to sell their mortgages to either government-sponsored enterprise.

Nearly one in five of all automated mortgage approvals exceeds the 43 percent debt-to-income ratio to which QM loans are limited, Haynie notes. Fannie and Freddie recently began offering free access to their automated underwriting.

Community banks need regulatory relief so they can stick to their proven strategy of putting well-underwritten mortgages in their portfolio. As Lindow points out, having to stringently document the income of small “mom and pop,” self-employed individuals to meet the QM standards can be unduly burdensome for any lender because many self-employed applicants do not routinely prepare financial statements. Such results support a case that non-QM lending, done thoughtfully and cautiously, could benefit some community banks and, of course, more of their customers.

Howard Schneider is a freelance financial writer in California.

ICBA Welcomes CFPB Final Rule Implementing QM Changes

In September, the Consumer Financial Protection Bureau adopted several ICBA recommendations in a final rule that will broaden the small-creditor and rural definitions of the Qualified Mortgage lending rule. The ICBA-advocated changes, which will take effect in January, will allow more community banks to receive QM legal safe-harbor protection for loans they originate and retain in portfolio. The changes also will provide additional relief from mandatory escrow requirements and include more balloon-payment loans as qualified mortgages.

The final rule expands which institutions can qualify as a small creditor to include banks that make fewer than 2,000 loans annually, up from the previous threshold of 500. Loans held in portfolio will not count toward the loan total. Further, the final rule expands the definition of “rural” to include any census blocks that are not in an urban area as defined by the Census Bureau.

The changes follow this year’s release of the ICBA Community Bank Lending Survey, in which three-quarters of community bank respondents said new mortgage regulations are keeping them from making more residential mortgage loans. ICBA continues to support statutory changes to the QM rule under its Plan for Prosperity legislative platform.

“ICBA strongly supports the CFPB’s reforms to its QM rules, which will help ensure community banks can continue making mortgage loans in their communities,” said ICBA Chairman Jack Hartings, president and CEO of The Peoples Bank Co. in Coldwater, Ohio. “The additional flexibility CFPB has provided will enable community banks to better meet the mortgage credit needs of their customers who may not fit a standardized mold.”

For more information and resources, visit ICBA’s Mortgage Rules Resource Center online at

ICBA’s 2015 Policy Resolutions for Mortgage Lending Reform

  • Efforts to protect consumers from abusive lending practices should not prohibit responsible, though unconventional, loan products created to meet the diverse needs of consumers, including lower-income borrowers, borrowers in rural and underserved communities and first-time homebuyers. These products help community banks meet the unique credit needs of their customers and support economic development in many communities.
  • All loans originated and held in portfolio by community banks regardless of loan pricing, including balloon mortgages, should receive Qualified Mortgage safe harbor status under the Consumer Financial Protection Bureau’s Ability-to-Repay rules.
  • If the CFPB does not give community bank portfolio loans automatic QM safe harbor legal status, then ICBA urges it to eliminate the use of the “rural” and “underserved” designations for QM eligibility for community bank balloon mortgage loans held in portfolio. ICBA supports increasing the annual loan origination limitation for “small creditors” and excluding portfolio loans in determining whether a bank meets the limitation.
  • Community banks should be exempt from escrow requirements for loans held in portfolio.
  • The CFPB’s “small servicer” exemption threshold should be increased from 5,000 loans to 20,000 loans. However, to be fully beneficial an increase in the threshold should be accompanied by corresponding relief from the punitive capital treatment of mortgage servicing assets under Basel IIII.
  • The CFPB must provide written guidance and clarifications to all its rules on a timely basis to enable compliance by all lenders. In particular, the CFPB needs to address issues such as the prohibition on initiating foreclosure actions on uncooperative borrowers for loans that are perpetually 90 days delinquent.

Read more about ICBA’s policy resolutions, including its mortgage lending resolutions, online at, under the Advocacy tab.