A letter from the AEI Housing Center states that replacing the debt-to-income ratio in the QM rule with the Average Prime Offer Rate (APOR) would be “dangerous” and a “major policy mistake.”
“The APOR does not accurately capture risk, could be subject to gross manipulation, and would not provide any friction to slow down unsustainable levels of home price appreciation,” AEI states in its study. “It would increase the permeability with FHA and would make tracking mortgage risk much harder.”
AEI continues, by saying there is no evidence to support the statements that most loans are “documented until the borrower qualifies.”
“DTIs are not perfect but they are still a useful tool in assessing credit risk,” the report said.
AEI says a better solution than then APOR is to replace the 43% DTI limit applicable to QM loans with a stressed Mortgage Default Rate limit, which captures risk while ensuring “responsible, affordable mortgage credit availability.”
The Consumer Financial Protection Bureau (CFPB) announced last year it will let the QM rule expire in January 2021 or after a short extension to ensure a smooth transition away from the rule.
AEI said the defining feature of the U.S. housing market since 2012 has been too many consumers chasing too little supply.
“During a seller’s market, holding supply constant, additional demand will be absorbed into higher home prices,” the report states. “The QM rule and the QM Patch, which was announced in January 2013, have both pro-cyclically supported the current home price boom by providing additional leverage to borrowers to bid up prices during this seller’s market.”
The report adds that both policies allowed higher leverage in a seller’s market. AEI states that this leverage will be “pro-cyclical” and higher home prices will be the result.
“Since the rules were announced in January 2013, this impact has been the most pronounced for entry-level homes, where supply has been tightest,” AEI said.