Prominent members of the housing industry are calling for an end to the QM Patch, and reform for Qualified Mortgages.
A rule that allows government-sponsored enterprises Fannie Mae and Freddie Mac to sidestep stricter mortgage underwriting requirements is set to expire in 2021, and while that may seem like a ways away, its pending removal has sparked widespread debate throughout the industry.
Known as the QM patch, the rule exempts GSE-backed loans from abiding by the full scope of the Ability to Repay/Qualified Mortgage rule, which requires lenders to adequately verify a borrower’s ability to repay their mortgage in the underwriting process.
Recognizing that the rule has shifted an increasing market share toward the GSEs, the Consumer Financial Protection Bureau has expressed its intent to allow the rule to expire as planned.
The rule also includes a stipulation that a borrower’s monthly debt-to-income ratio cannot exceed 43%, but that condition does not apply to loans backed by the government (Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture).
But the Mortgage Bankers Association believes the CFPB should not let the QM Patch expire without a defined plan to continue to serve creditworthy borrowers who don’t reach the 43% debt-to-income ratio.
“Expiration of the Patch without a defined plan to continue to serve these borrowers will have dramatic negative consequences for the housing market, resulting in more expensive or unavailable credit," the MBA explained in a letter to the CFPB.
Here are some of the suggestions the MBA has for the CFPB to reform the QM standard before the QM Patch expires to achieve the appropriate balance between the bureau’s dual statutory mandates, which require consumer protection and promotion of the availability of affordable credit:
- Eliminate the rigid 43% DTI ratio threshold and Appendix Q, or any reliance on it as a documentary standard.
- If the bureau retains a DTI ratio threshold despite it not being strongly predictive of repayment ability, allow for the use of other government-approved documentation and verification standards to determine DTI ratios in addition to Appendix Q.
Norbert Michel of The Heritage Foundation and Edward Pinto and Tobias Peter of AEI Housing Center also submitted a comment letter to the CFPB on the QM Patch. In it, they made several recommendations including:
- The bureau should eliminate the 43% DTI limit applicable to QM loans and substitute a stressed Mortgage Default Rate limit.
- The CFPB should test the effectiveness of the residual income method in reducing default rates under stress conditions.
- The bureau should test the effectiveness of varying levels of months of principal, interest, taxes and insurance reserves at origination in reducing default rates under stress conditions.
The National Association of Realtors estimated that more than 3.3 million home purchases financed since 2014 fall into this market segment. NAR explained that any disruption could raise costs and reduce access to mortgages for hundreds of thousands of otherwise creditworthy homebuyers each year.
“The National Association of Realtors has worked alongside the CFPB to find the most palatable, pragmatic approach to improving the QM definition and patch,” NAR President John Smaby said. “While we collaborate with the CFBP to develop a permanent solution that will ensure stability in the housing market, we will continue to contend that any replacement rule must be holistic, look at the complete borrower and must build on the liquidity the QM patch provides in the market.”
The Urban Institute also sent a letter to the CFPB, urging the bureau to change the ability-to-repay and qualified mortgage rule by dropping the debt-to-income ratio entirely, because the think tank believes it is a weak predictor of default. Its researchers also recommend an increase in the rate-spread threshold—the bright line separating safe harbor loans from rebuttable presumption—from 150 to 200 basis points.
Beyond that, gour of the largest mortgage lenders in the country are also leading a coalition that is calling on the CFPB to make to changes to the Ability to Repay/Qualified Mortgage rule.
Specifically, the group, which includes Bank of America, Quicken Loans, Wells Fargo, and Caliber Home Loans, wants the CFPB to do away with the QM rule’s debt-to-income ratio requirement.