The Qualified Mortgage Rule (QM), introduced in 2014, was designed by the Bureau of Consumer Financial Protection (BCFP) [1] to prevent borrowers from obtaining loans they could not afford and to protect lenders from borrower litigation. 400,000 high debt-to-income (DTI) mortgages met the BCFP’s definition of a QM last year, thanks to an exemption that grants QM status to lenders making high DTI loans if those loans are guaranteed by Fannie Mae or Freddie Mac.
However, this exemption, or “GSE Patch” is set to expire either January 10, 2021, or when the GSE’s exit conservetorship, whichever comes first. In a paper from the Urban Institute, [2] Urban Research Associate Karan Kaul and Vice President, Housing Finance Policy Laurie Goodman Give three possible options for addressing the soon-to-be expired GSE Patch.
The first option Urban Institute suggests is the obvious one: preserve the GSE Patch as it is. This can be done by simply extending the rules, or through modest expansion of the GSE Patch. The Urban Institute states that this option may only yield modest benefits, mostly for the high end of the market.
The second option is to drop the DTI Cap and GSE Patch from
The QSE definition, implementing a “safe harbor” standard. Restrictions on risky products, loan terms, and points and fees would not be touched. A lack of DTI cap or patch would “provide safe harbor status to first-lien mortgages as long as their annual percentage rate is no more than 150 basis points over the APOR.”
According to Urban, this style of rule would offer several advantages: mortgage rates reflect credit risk more holistically than DTI ratios, it would create a more level playing field, facilitate innovation, and include ample precedent for a rate-spread test.
The last option put forth by Kaul and Goodman in their paper is to simply take no action on the patch, letting the GSE Patch run its course through 2021, leaving a hard 43 percent DTI cap for Fannie and Freddie guaranteed mortgages behind. This option, however, would not be so simple due to the fact that the FHA, VA, and USDA would implement their own rules with no cap, forcing some high-DTI to move to the FHA.
The paper concludes by stating that the upcoming expiration is a chance for improvement. Find the complete paper here. [2]