The Consumer Financial Protection Bureau (CFPB) recently announced that it plans to terminate the GSE patch, a safe harbor under its Ability to Repay requirements for loans eligible for purchase by Fannie Mae or Freddie Mac, on its scheduled expiration date of January 10, 2021, or possibly after a short extension.
The announcement has triggered consternation within the industry over how the removal of Qualified Mortgage (QM) status for GSE loans with debt-to-income (DTI) ratios of over 43% will affect credit availability throughout the country. It also launches a rulemaking that ultimately could lead to a revamping of the QM regulation.
The Reasons Why
The CFPB adopted the temporary GSE patch in its 2013 QM rule because it believed that as the mortgage market recovered from the prior decade’s mortgage crisis, it would rely less on the patch and shift to standard QM loans or non-QM loans for consumers with DTI ratios above 43%.
It now finds that these predictions were overly optimistic. It said in its Advance Notice of Proposed Rulemaking (Notice) that, contrary to its expectations, loans within the GSE patch represent a ‘large and persistent’ share of conforming mortgage originations. It also noted that lenders generally offer a QM loan under the GSE patch exemption even when a standard QM loan could be originated. “As long as [the GSE patch] continues, the private market is less likely to rebound,” it said.
The CFPB requests comment on how to minimize the disruption of the GSE patch expiration and on other portions of its QM rule, which are due 45 days after the proposal’s publication in the Federal Register.
The Potential Impact
In its Notice, the CFPB notes that Fannie Mae and Freddie Mac purchased nearly 52% of all closed-end first-lien residential mortgage loans made in 2018 and that 31% of these loans had DTI ratios that exceeded 43% - meaning that the loans would not qualify as a standard QM. It identifies three possible results of the GSE patch expiration for consumers with DTI ratios above 43%: (1) some will seek FHA loans; (2) some may be able to obtain loans in the private market; and (3) some may not be able to obtain loans.
CoreLogic, a housing analytics firm, has posted its three-part analysis of how the expiration of the GSE patch can affect credit availability, based on data involving borrowers with DTIs of over 43%. Its findings include the following:
Roughly 16% of the total 2018 mortgage origination volume was QM-eligible solely because of the GSE patch.
Younger millennials and retirees (borrowers aged below 33 and over 65) are likely to be impacted disproportionally by the removal of the patch.
The impact is likely to be pronounced for Non-W-2 wage earners (the self-employed, retired, seasonal, and part-time workers), 37% of which had DTI ratios of over 43% in 2018 compared to 32% for W-2 borrowers.
The impact will be more evident for African American and Hispanic or Latino borrowers, who were 1.6 times more likely to have a DTI of over 43% in 2017 than non-Hispanic white borrowers.
Low-income borrowers are more likely to be impacted by the removal of the patch since they are more than twice as likely as the upper-income borrowers to have over 43% DTI.
Opportunities to Comment on GSE Patch and Other QM Issues
The CFPB solicited comments on how to lessen the impact of the GSE patch’s January 2021 expiration by posing numerous questions, such as:
Should the CFPB continue only to use a DTI limit to measure a consumer’s personal finances, or should it replace or supplement the DTI limit with another method?
Should the DTI limit remain at 43%?
Should the CFPB grant QM status to loans with DTI ratios above a prescribed limit if certain compen-sating factors are present?
Should the CFPB consider any other changes to the Qualified Mortgage regulation? This question provides an opportunity for the real estate industry to urge the CFPB to eliminate the provision in the QM rule that discriminates against affiliated companies by counting affiliated (but not unaffiliated) title and other charges towards the 3% points and fees cap imposed on Qualified Mortgages.
While the prospect of no GSE patch after January 2021 is daunting to many, the new rulemaking also provides an opportunity for the real estate industry to weigh in with its views – not only on how to minimize disruption to the mortgage market when the patch expires, but on other QM requirements that have made compliance difficult or have limited credit availability for their customers.
Sue Johnson is the former executive director of RESPRO, the Real Estate Services Providers Council Inc. She retired in 2015 and is now a strategic alliance consultant.