The Consumer Financial Protection Bureau (CFPB) made waves in the mortgage industry last Thursday when it announced it plans to retire the qualified mortgages (QM) patch. The policy gives government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac a competitive advantage in complying with underwriting rules.
The QM patch exempts GSE-backed loans from complying with the full underwriting standards of the CFPB’s ability-to-repay rule. The rule requires lenders to verify a borrower’s ability to repay their mortgage during the underwriting process, stipulating that borrowers’ debt-to-income (DTI) ratio not exceed 43%. Fannie and Freddie loans, all of which are qualified mortgages, have not been subject to the DTI mandate since 2014.
In public comments issued last Thursday, the CFPB announced its commitment to the planned expiration of the QM patch in January 2021, noting the potential for brief extensions to “facilitate a smooth and orderly transition.”
In conjunction with the announcement, Structured Finance Association CEO Michael Bright spoke with CFPB Director Kathy Kraninger and released the following statement:
“The Structured Finance Association very much appreciates the fact that the CFPB is giving the important topic of Ability to Repay and the Qualified Mortgage focus and attention. We thank them for this work, and we look forward to working with them, and other policymakers and regulators, on a solution that works for the entire market ecosystem as well as homeowners in every community.”
More than 30% of GSE-backed loans exceed 43% DTI, and all are compliant under the CFPB’s current exemptions. The anticipated revisions to CFPB regulations would reduce GSE advantage in the national mortgage market. Absent additional rules or updated regulations, all GSE-backed loans with DTI ratios above 43% would become noncompliant with QM. The impact of such changes will force changes in the mortgage market, though such changes could result in a level playing field that allows private capital to compete with the GSEs. Without a careful transition, this could provoke disruption in the housing market, and the agency is considering adjustments to the DTI limit to preserve access to credit for the borrowers currently being served by the QM Patch.
“To really address rising share of loans with higher DTI ratios, the government needs to do more to address the lack of affordable housing that have priced lower-income families out of the housing market,” said Bright. “The patch is acting as a Band-Aid over a much deeper issue that we have in this country, which is that incomes are going up much more slowly than home prices.”
Federal Housing Finance Agency (FHFA) Director Mark Calabria rejected estimates that one-third of GSE-backed loans exceed the 43% DTI limit, describing them as “static estimates” and “unrealistic worst-case scenarios.” The quantity of high-DTI loans in the mortgage market will impact the Trump administration’s plans for GSE reform.
“In our view, the market will want to better understand the ramifications of ending the QM patch on Fannie and Freddie before they commit upwards of a $100 billion to recapitalizing them.” Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a note.
Calabria called the CFPB’s move away from the QM patch a “critical component of moving toward a competitive mortgage finance system.” Any GSE reform plan would require a substantial recapitalization effort, ensuring the mortgage giants’ financial autonomy before privatization. Some analysts believe that the expiration of the QM patch could result in lower revenue and profit at Fannie and Freddie, undermining the administration’s effort to release the GSEs from their longstanding conservatorship.
Read more via American Banker.