New QM (Qualified Mortgage) Rules Produce Higher Costs and Elevated Risk Factors

In order to achieve a higher rate of accuracy in defect detection, he said, "That's going to eventually prompt the industry to go from its current manual methods to something much higher tech that produces more efficient results without having to crack a loan file every time a defect rate needs to be calculated," he continued.

Showalter said that lender communities, especially the larger ones, are starting to explore such technology that will detect manufacturing defects, enabling them to take a more efficient look at a broader population of loans.

Among smaller and mid-sized lenders that do not have the financial ability to purchase such technology, he said there are two trends emerging.

"One is that some are also seeking less expensive tools that will help augment their process in surveying loans electronically and therefore not expend as much labor in the process of analyzing and meeting a defect rate goal," Showalter explained. "Others are thinking about issuing non-QM qualified mortgages and selling them on the private market, therefore avoiding any dealings with the GSEs,” he continued.

However, he noted that at the present time, this segment is waiting and watching to see what may happen to the private label market.

Showalter thinks a coming trend will be that small lenders may rely on larger ones who have invested millions in the creation of infrastructure capable of managing the new and more stringent loan requirements. "I honestly think that the loan manufacturing requirements placed on the industry is far more than most lenders will be able to respond to quickly, especially the smaller or mid-sized ones," he concluded.

Showalter offers some predictions for 2014: "I think you will see bigger lenders buying up smaller ones so that they can increase their market share and spread the expenses for compliance across more loans. Another reason for acquisition and consolidation is that the mortgage loan volume is not particularly high right now, and as long as it's in the doldrums, there will be a lot of pressure to consolidate."

He also believes that although housing prices have gone up a little and interest rates are still stable, median income and the labor participation rate will continue to go down. "This means there are fewer well-employed people who are able to qualify and buy a home," he explained. "In addition, most origination now is going to be on a purchase money basis as opposed to a refinance basis, which brought in a lot of borrowers in the past several years. Now mortgage lenders are looking for purchase money candidates, and let's face it, the number of fish in that pond is just not what it used to be.”