How can mortgage lenders best navigate the fine line between reducing the risk of lending to highly leveraged borrowers and making homeownership available to more people? Over the decades, the pendulum has swung between tight lending standards that are safer (but more restrictive) and looser standards intended to help first-time homebuyers, lower income borrowers, or those with student loan debt.
In the wake of the mortgage crisis, the CFPB passed the Qualified Mortgage (QM) and Ability to Repay (ATR) standards to reduce the number of risky loans lenders had on their books (see 12 C.F.R. § 1026.43). However, the tighter standards made it much more difficult for the average homebuyer to qualify for a loan.
To address the issue, the Congress introduced the “QM Patch” in 2014 as a temporary measure to provide greater access to homeownership (see 78 FR 6533 ). The patch enabled Fannie Mae and Freddie Mac to bypass the 43% debt-to-income (DTI) ratio and accept loans as high as 50%. Once the patch expires in January 2021, the GSEs will no longer be able to breach the previously held regulations to issue loans beyond that limit.
The Patch has worked as intended. The Urban Institute estimates that an additional 3.3 million mortgages were originated between 2014 and 2018 because of the patch. However, regulators are closely watching the increase in risk that comes with more loans being closed with borrowers carrying a higher DTI. Recently, the CFPB has publicly indicated that it intends for the QM Patch to expire on schedule (or after a brief extension), to help push the pendulum back toward lower risk (see 84 FR 37155 ).
Should the Patch Expire?
When it comes to letting the patch expire, there are two distinct camps. Some worry that allowing the QM Patch to expire will decrease mortgage availability, specifically for those with low incomes. Others claim that the patch has allowed for an uneven playing field, with GSE’s solely having the ability to take on these “riskier” loans and that this will equal it out again.
Advocates of letting the patch expire point to the intent of the rule being temporary and that it was not meant to be a long-term solution. They also note that the early notice of the expiration date should help all parties involved have time to prepare and to adjust their procedures. GSEs, however, are more than likely less thrilled with the news as they will lose their competitive advantage.
There have been talks regarding the current QM Rule and whether amendments will be made to accommodate the fact that young people looking to take on mortgage loans come in with higher amounts of debt than previous generations. Some industry institutions, including the Mortgage Bankers Association, are hoping to see more flexibility in DTI restrictions to accommodate for that and work to assist those with debt to enter the housing market with ease.
Borrowers and lenders alike will have to wait and see how this plays out and how the market deals with such a change. But until January 1, 2021, GSE’s still have the wherewithal to provide loans outside the 43% limit.
At Docutech, we’ll keep you up to date on the latest regulatory changes, including any changes to QM and the QM Patch.