In what was largely expected, CFPB Director Kathy Kraninger signaled the bureau’s intention to extend the GSE patch beyond next January as it works to tweak the Qualified Mortgage rule.
At issue is the hard debt-to-income ratio (DTI) limit of 43% that applies to all home loans seeking QM status, which at the moment excludes loans backed by Fannie Mae and Freddie Mac, along with government loans like FHA, VA, and USDA.
However, the exclusion is only temporary when it comes to Fannie and Freddie, the two biggest players in the mortgage business, and is set to expire in January 2021.
That could cause relative chaos in the mortgage industry, with many loans currently being underwritten with much higher DTI ratios.
In fact, 16% of 2018 residential home loan origination volume was affected by the patch in some way, which if suddenly removed would certainly dislocate the mortgage market.
As such, Kraninger made clear in a letter to lawmakers last week that the CFPB would extend the patch.
Additionally, she noted the agency’s intention “to move away from the use of debt-to-income ratios as a QM qualification standard,” something that was initially suggested in a letter sent to Kraninger last summer from some of the largest mortgage lenders and housing advocacy groups.
That same group also expressed their discontent with Appendix Q, which could also be dropped if they get their way.
More Details Coming in May or Earlier
Kraninger noted that the bureau is working on a proposal that should materialize “no later than May 2020.”
It could include dropping the DTI requirement entirely, which the U.S. Department of Treasury also found troubling for several reasons.
Treasury said, “the patch gives the GSEs a competitive advantage over portfolio lenders and other market participants.”
It mentions the fact that the GSEs impose underwriting requirements that don’t relate to a borrower’s ability to repay, such as maximum loan limits, which shut out jumbo loan lenders.
And they argue that the patch provides “a quasi-regulatory role in defining ability-to-repay requirements” for the GSEs that wouldn’t be appropriate once they exit government conservatorship.
Simply put, Fannie and Freddie can’t continue to enjoy a double standard, especially if they are private companies, and that will likely lead to rule changes soon.
Treasury recommended alternatives to define a QM loan, such as if financing costs are below a key threshold, or designating a home loan a QM after a specified seasoning period (held on lenders’ books).
Ultimately, it sounds like everyone involved is on the same page, so it’s very likely these ideas will be included in the forthcoming proposal.
While the hard DTI limit’s removal would perhaps lower non-QM loan market share, it could still retain a sizable portion of the market if lenders still feel burdened by the revised rules.