The Qualified Mortgage (QM) regulation has not materially increased mortgage costs or decreased access to credit, according to a report published by the Consumer Financial Protection Bureau (CFPB) on January 10.
These were two of many observations made by the CFPB in its mandatory five-year assessment of the QM Rule, which provides a safe harbor under Dodd-Frank for Qualified Mortgages that meet designated criteria to better assure that a borrower has a reasonable ability to repay the loan.
To prepare for the report, the CFPB solicited 2017 comments on the QM Rule, researched a National Mortgage Database it has developed with the Federal Housing Finance Agency, conducted a 2018 Lender Survey, reviewed application data from nine large depository and non-depository lenders, and analyzed HMDA data.
Here are some of the highlights:
• Loan features: Loan features contributing to foreclosure within two years of origination (e.g., loans combining low initial monthly payments with subsequent payment reset or those made with limited/no documentation) had largely disappeared from the market prior to the adoption of the Rule, and today appear to be restricted to a limited market of highly credit-worthy borrowers.
• Debt-to-Income Ratio ( ): Even though house prices have largely returned to pre-crisis levels, currently 5 to 8 percent of conventional loans for home purchase have DTI exceeding 45 percent; in contrast, approximately 24-25 percent of loans originated in 2005–2007 exceeded that ratio.
• Delinquency rates: The Rule’s introduction generally was not associated with an improvement in loan performance. In part, this is because delinquency rates on mortgages originated in the years immediately before its effective date were historically low, as credit was already tight at that time.
• Mortgage volume and approval rates: Overall, there was not a significant change in the volume of mortgage applications or the average approval rate at the time the QM Rule became effective, partly because credit had substantially tightened before the Rule took effect and partly because 97-98 percent of loans originated the year before the Rule would have met QM requirements.
• High DTI borrowers/GSE loans: The Rule has not decreased access to credit by high DTI borrowers (borrowers with a DTI above 43 percent) who qualify for GSE loans because such mortgages meet the standards for QM loans.
• High DTI borrowers/non-GSE loans: Application data from nine larger lenders indicate that the Rule displaced 63 to 70 percent of approved applications for home purchase by high DTI borrowers seeking loans that are not GSE-eligible (most commonly due to loan size) from 2014 to 2016. The data also indicates that approval rates of non-QM, high DTI borrowers seeking to purchase homes declined across all credit tiers and income groupings.
• Self-employed borrowers: The Rule did not impact access to credit for self-employed borrowers seeking GSE-eligible mortgages, but lenders originating loans for self-employed borrowers who do not qualify for GSE-eligible mortgages may find it difficult to comply with standards relating to the documentation and calculation of income and debt. Nevertheless, application data indicates that the approval rates for non-high DTI, non-GSE eligible self-employed borrowers have decreased only slightly.
• Small loans: While fixed origination costs could make it easier for smaller loans to exceed the QM points and fees cap, HMDA data indicate that the Rule likely had no effect on access to credit for these loans, and responses to the Lender Survey indicate that lenders handle such applications on a case-by-case basis to avoid exceeding the cap.
• Overall cost: At the aggregate market level, the Rule did not appear to have materially increased costs or prices around the time of its implementation. The spread between the average interest rate on 30-year fixed-rate mortgages over the applicable Treasury rate has remained constant since its implementation.
• GSE vs. private label market share: The current QM category is broad due to the inclusion of GSE eligible loans; the inclusion of which is set to expire by January 2021. Contrary to the CFPB’s expectations at the time of the rulemaking, the GSEs have maintained a persistently high share of the market since the Rule took effect, while the private label mortgage-backed securities market’s share remains relatively small.
• Closing times immediately after the effective date of the Rule increased by about 3.5 days for refinance loans and a little over a day for purchase loans. It’s likely that these short-term effects attenuated over time due to learning and adaptation to the new requirements.
While the report made no recommendations for how to improve the rule, CFPB Director Kathy Kraninger said in her accompanying message that its publication “is not the end of the line” for the Bureau. “The agency is interested in hearing reactions from stakeholders,” she stated.
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