With recent changes in QM/ATR rules along with intolerance for any error which may impinge marketability or the ability to expeditiously foreclose, mortgage originators are facing a variety of increased risks.  Sure, lenders can create unspecific GAAP reserves, but those unspecific reserves are not tax deductible. To help mortgage bankers avoid staying up at night worrying about their secondary market/QM business risks and be able to reduce current taxable income, The Tomorrow Group and Wingspan Insurance Services have partnered to create SMART, the Secondary Market Assurance Reimbursement Trust, an innovative and highly tax-efficient solution that takes a proven captive concept and applies it to the mortgage banking business. These products neatly solve the tax inefficiencies of loan loss reserves and particularly help lenders involved with third party originations to efficiently manage counterparty risk. Servicers facing FHA and GSE curtailment risks or originators concerned about possible CFPB fines for HMDA and other errors hitting next year could find these approaches quite helpful in reducing current taxes and smoothing results for 2014 and 2015. Contact Tony Schweiger at aschweiger@thetomorrowgroup.com or go to http://www.secondarymarketinsurance.com/ to schedule a conversation at the MBA convention (Wingspan Booth) or soon after the conference.

Speaking of QM, we've had some pretty big QM news this week. "The Agencies are issuing this statement to describe some general principles that will guide supervisory and enforcement activities with respect to entities within their jurisdiction as the Ability-to-Repay Rule takes effect in January 2014. In the Agencies' view, the requirements of the Ability-to-Repay Rule and ECOA are compatible. ECOA and Regulation B promote creditors acting on the basis of their legitimate business needs. Viewed in this context, and for the reasons described below, the Agencies do not anticipate that a creditor's decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution's fair lending risk." Read it and weep, or read it and look for clarity, either way here it is.

(Read More: Regulators Give Lenders Green Light to Offer Fewer Options)

Speaking of QM (again), I am no expert and for some reason believe that either the CFPB will enlarge the very-confining QM box (especially when special interest groups point to the negative impact on the consumer) or that certain investors will offer to buy the product, but at a certain rate and price commensurate with risk of potential liability (once again negatively impacting the consumer). Sure, the 3% cap will be dealt with by merely adding the fees into the rate (once again impacting the borrower). But although I don't know the guidelines and intricacies as well as many, I do have some notes on the QM/non-QM situation taken from various presentations when I am able to read my own scrawl that might help folks out there. And the better we all understand something that is going to drive up compliance costs, drive down margins and volume even further, the better - right? So let's take a look at the "Ability to Repay: Lending Outside the (QM) Lines".

First of all, many industry pundits say there won't be any non-QM lending based on experience with HOEPA for various reasons (assignee liability, counseling and foreclosure defenses, virtually no one makes HOEPA loans, and so on). But of course if a lender only does QM loans, volume will drop, and profitable customers may not qualify under QM (like make-sense jumbos over 43% DTI and low LTV loans with compensating factors). And remember - even the CFPB admits that non-QM loans are not bad loans. Lenders say that it is easy to exceed points and fees tests for Higher Cost loans, and wonder if only doing QM loans will really excuse them from future lawsuits.

For nationwide lenders, or lenders on either coast, there are some important jumbo issues. Namely, they are not covered by temporary GSE QM exception due to loan size (by definition they are over the conforming limit so can't qualify for GSE exception), but if over 43 % DTI a lender must apply the general ATR rule, and product limitations, such as no balloons, and prepay limits may also limit ability to use QM on jumbos.

Let's take a step back for a moment. The basic "Ability to Repay" rule says that creditors must make a "reasonable and good faith determination, at or before consummation, that the consumer will have a reasonable ability to repay the loan according to its terms." This applies to all consumer credit transactions secured by a dwelling, except HELOCs, investment properties (business purpose), timeshare plans (all those salesmen are safe!), reverse mortgages, temporary or "bridge" loans of 12 months or less, or construction-to-permanent loan with a construction phase of 12 months or less (and non-std. refi's). I have definitely heard the argument that most lenders are already taking ATR into consideration - that it is just good, common sense underwriting.

But the complexity of ATR comes from three basic sources. First, lenders can opt for the QM path: either a safe harbor from, or a rebuttable presumption of compliance with, ATR factors. Second is the general ATR option, meeting the eight general underwriting factors for ATR lending (current or reasonably expected income or assets - other than the value of the collateral, if the creditor relies on income from the consumer's employment, then the consumer's current employment status, the monthly payment on the loan, the monthly payment on any "simultaneous loan" that the creditor "knows or has reason to know" will be made, monthly payment for "mortgage-related obligations" like taxes and insurance, current debt obligations, alimony and child support, monthly debt-to-income ratio (DTI) or residual income, and credit history). And the third is the refinance of a non-standard mortgage into a standard mortgage.

I will continue the discussion tomorrow with some informal notes on the risks of Ability to Repay violations and how lenders might minimize risk.

Let's take a look at an upcoming conference, besides the MBA's this weekend, and some investor updates to give us a sense of lending trends.

The Texas Mortgage Bankers Association is holding its 63^rd annual Educational Seminar and Marketplace in Dallas Texas November 12 & 13.  It will be followed by Mortgage Servicing Forum on November 13 & 14.  For the Educational Seminar and Marketplace, the TMBA has secured a dynamic lineup of mortgage industry professionals AND external business motivators to provide relevant information for today's challenges. Speakers include Tom Black (Blackman and Graham), Ari Karen (Offit Kurman), Debbie Dunn (SWBC), Steve Spies (FNMA), Tim Elkins (Prime Lending), Lawrence Huff (Optimal Blue) Tyler Sherman (Motivity Solutions) and Mark Todd (Gateway Funding), a panel of CEOs, Casey Cunningham  - CEO and Founder of Xinnix and many more! (Heck, even me!) The TMBA hopes to see you all there.  Registrations can be secured at http://www.texasmba.org.

M&T Bank has clarified that, for VA IRRRLs, the maximum loan amount of the new loan is the existing loan balance including accrued interest plus closing costs and prepaids, late fees, escrow shortages if applicable, and the VA Funding Fee.

Affiliated Mortgage is now offering its DU Refi Plus Fixed Rate products for properties in Alabama, Arizona, Connecticut, Delaware, Nevada, New Mexico, North Carolina, and North Dakota.

The Federal Reserve Board announced the termination of the enforcement action against the Bank of New York Mellon, New York, New York (Cease and Desist dated April 13, 2012, terminated October 16, 2013) Congrats!

MSI has reduced the Minimum Net Worth requirement for all Tier 1 correspondents to $100,000 and has increased the MNW requirement for Government Delegated Underwriting authority from $500,000 to $1 million.

NY-based Bexil Corporation has announced that its subsidiaries Bexil Mortgage and Castle Mortgage have launched their new AmnetCastle Express software, which allows brokers to access their pipeline and pricing from mobile devices.  Users are also able to submit and clear conditions and add notes to loan files.  More information can be found at http://www.amnetcastleexpress.com/.

PHH revised the release date for its 5/1 Conforming ARM products with the 2/2/5 cap structure to October 19^th.  Loans with the existing 2/2/6 cap structure must be delivered and in "In Underwriting" status by December 20^th, closed and in "In Post Closing" status by January 17^th, and purchased by January 31^st. 

PHH will be retiring all of its Conforming Interest Only ARM products effective with all new registrations dated November 16^th and after.  Any applicable loans registered before this date need to be sent in for review and be in "In Underwriting" status by February 15, 2014, in "In Post Closing" status by March 15, 2014, and purchased by March 28, 2014.

Turning to the markets, at least rates have moved lower as we enter the traditional slow six months of the purchase business. Companies are out there debating the amount of revenue and compliance pain they want to endure until Easter, if not past that. And capital markets crews wonder about how many renegotiation requests they are going to see (and wish they could do the same to borrowers when rates went the other way): in the past six days, 3s, 3.5s, and 4s have rallied 68, 59 and 42 ticks (32nds), respectively, and the 30-year coupon yield has declined 25 basis points to 3.15% due to increased expectations that the FOMC will delay tapering until March 2014. Yes, rates have stabilized and moved lower, but few, if anyone, thinks rates will head low enough to significantly stimulate refinancing activity. This should keep originator supply relatively in check, and many lenders are indeed wondering if they have cut personnel expenses enough.

So yesterday agency MBS prices improved between .125-.250, depending on coupon, and the 10-yr price improved about .250. This morning we'll have weekly Initial Jobless Claims (expected at 340k, down from 358k). It is still pretty early here in North Carolina, but in the early going rates are little changed from Wednesday afternoon. Our friend the 10-yr closed at a yield of 2.49%, and this morning it is sitting around 2.50% with agency MBS prices flat.