OREANDA-NEWS. Major U.S. residential mortgage servicers have yet to see any borrower claims over two years after the 'Ability to Repay' (ATR) rule was introduced, according to Fitch Ratings. That, however, could change over time with certain non-QM loans becoming more commonplace.

The lack of borrower claims to date is not unexpected. Most loans (including all GSE-eligible loans) meet the definition of a Qualified Mortgage (QM) and receive safe harbor protection from the ATR rule. In the non-agency sector, few non-QM loans have been securitized to date. Of the more than 10,000 loans included in Fitch-rated newly originated mortgage pools since the start of 2014, only 14 have been classified as non-QM and are thus vulnerable to ATR claims.

Of the small fraction of loans not eligible for safe harbor, the combination of tight underwriting and a supportive economic environment has kept default rates low. In the newly originated Fitch-rated mortgage pools issued since the start of 2014, only three loans are currently more than 60 days delinquent (none non-QM). Anecdotally, Fitch has been told default rates on non-QM loans that have not been securitized have been very low as well.

Because Fitch expects ATR claims to generally only occur after a default, lower credit quality or non-appendix Q non-QM loans having a higher default risk may have a higher probability of a successful claim. Fitch is likely to apply increased loss expectations for these loans.

Non-QM origination volume for these products, while still limited today, appears to be growing and could become more common in the future. Fitch updated its Non- QM criteria last month for analyzing the claim likelihood for loans with these risk characteristics.

The ATR rule came into effect for applications on Jan. 10, 2014 to provide borrowers with greater protection from harmful lending practices. Under ATR, mortgage lenders must make a reasonable effort to determine if a borrower has the ability to repay the mortgage before the loan is made. ATR mandates a repayment analysis for closed-end mortgage loans and prohibits certain loan terms and conditions.

Fitch will continue to monitor loan performance and servicer reporting for evidence of the use of ATR as foreclosure defense.