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NAR, MBA, NAHB and ABA decry “single-minded focus” on debt, income measure

Cash reserves are a better indicator of ability to pay, industry groups say

The heavy-hitters of the mortgage and housing industries teamed up to publish a joint statement on Monday decrying “single-minded focus” on a mortgage qualification measure known as the debt-to-income ratio, or DTI.

The Mortgage Bankers Association, the National Association of Home Builders, the National Association of Realtors and the American Bankers Association said regulations rely too much on a gauge that’s a “weak predictor” of a home loan’s likelihood of default.

“The discussion on mortgage risk has been colored by a single-minded focus on just one factor that lenders use to examine a borrower’s likelihood to repay a mortgage: the debt-to-income ratio,” said the jointly signed column that ran in the American Banker and the Asset Securitization Report. “Yes, the DTI is important. But it is just one of many considerations lenders use in combination when evaluating whether a borrower can and will repay a loan.”

The importance placed on DTI should be more in line with other qualifications, the groups said.

“Other factors including credit history, cash reserves, property equity and liquid assets also help to paint a more complete picture of a borrower’s true credit profile and the true risks assumed by a lender,” the statement said.

The amount of cash a borrower has is a better indicator than DTI, they said.

“Numerous studies have determined that DTI by itself is a weak predictor of a loan’s likelihood of default,” the groups said. “Other recent studies have shown that a borrower’s liquid cash reserves are a far more important indicator of risk when unemployment is rising.”

DTI ratios have improved this year as mortgage rates hovered near three-year lows and the economy entered its 11th year of expansion, according to Ellie Mae data.

The average ratios for closed loans in September were the lowest since 2016, which is also the last time mortgage rates were this cheap. The ratios measure how much of a borrower’s income goes toward a housing payment, as well as to all debt payments, so they tend to improve as rates drop.

The average “front end” ratio, measuring income compared to the debt incurred by the new monthly mortgage payment, was 24%. The average “back end” ratio, measuring all recurring debt including housing payments, stood at 37%. At the start of the year, the average front end ratio was 26% and the average back end was 39%.

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