CFPB proposes letting GSE patch expire

The Consumer Financial Protection Bureau (CFPB) has announced its intentions to allow the “GSE Patch” expire at the end of its term on Jan. 10, 2021.

Officially the Ability-to-Repay/Qualified Mortgage (ATR/QM) rule, the patch, as it is commonly called, is an exemption to the general qualified mortgage (QM) standard. The exemption applies to mortgage loans backed by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, through which such loans can still qualify as QMs even if the borrower carries a debt-to-income ratio above 43 percent.

With the 2021 deadline approaching, the lending sphere has been eager for clarity on the patch’s future. Many have been concerned with what its termination could mean for credit availability nationwide. Such concerns have existed for a while, given the broad impact of the patch on the post-recession mortgage landscape; about one in five GSE-backed mortgages originated in 2017 had a debt-to-income ratio over 43 percent.

A 2018 request for information from the CFPB regarding reforms to Fannie and Freddie, for example, elicited several recommendations from lenders and other stakeholders regarding the patch, either prolonging its existence or codifying the exception it provides. Those suggestions included eliminating the patch’s 2021 expiration and letting it exist indefinitely; replacing the patch by permanently raising the DTI threshold for QM loans; and continuing the patch until Congress comes up with an acceptable replacement.

And as 2019 has gone on, several trade groups have written about the need to extend the patch. The National Association of Hispanic Real Estate Professionals, for one, said that the patch’s expiry would be harmful for Hispanic homebuyers, given that they are often self-employed, more likely to work non-traditional jobs, and don’t often conform to traditional QM standards.

The CFPB’s proposal either to let the patch expire — either on its Jan. 10 end date or after a “short extension, if necessary” — casts all of those concerns into a very real light, though Kathy Kraninger, CFPB director, apparently isn’t as worried.

“The national mortgage market readjusting away from the patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protection,” she said. “We want to hear all perspectives on how to move beyond the GSE patch, the impact on credit, the role of the private mortgage market, and possible modifications to the definition of qualified mortgages and the rules governing the documentation of debt and income. The bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE patch.”

Motivations for ending the patch exist. For one, it put an additional $260 billion of mortgages on the government’s plate in 2018, and detractors of the patch say that the majority of that volume is tied up into risky loans. Terminating the patch would make it harder for borrowers carrying higher debt to find lenders willing to give them a mortgage, because loans issued to them wouldn’t be eligible for purchase by Fannie and Freddie.

Another impetus, administration officials and patch critics claim, is that the patch was never intended to be a long-term solution. The CFPB’s proposal to let the patch expire included reference to a five-year assessment released earlier this year. That assessment showed that the number of mortgages originated under the patch were ballooning, a development unexpected by the bureau when the patch was enacted.

“One main finding about temporary GSE QM loans was that such loans represent a ‘large and persistent’ share of originations in the conforming segment of the mortgage market. … [T]he GSEs’ share of the conventional, conforming purchase-mortgage market was large before the ATR/QM rule, and the assessment found a small increase in that share since the rule’s effective date, reaching 71 percent in 2017,” the proposal said.

“The continued prevalence of temporary GSE QM loan originations is contrary to the bureau’s expectation at the time of the ATR/QM rule.”

Mark Calabria, director of the Federal Housing Finance Agency which regulates Fannie and Freddie, downplayed credit availability concerns during a press conference after the CFPB’s proposal was announced.

“Adverse economic impact is not a legal justification for ignoring statute,” Calabria said.

The National Association of Realtors (NAR) reacted to the news with reaffirmed, if diplomatic, concern.

“The QM patch was intended as a temporary measure to prevent turmoil in the mortgage and real estate market as the CFPB implemented the Ability to Repay rule,” said John Smaby, president of the NAR. “Analysts estimate that as much as 30% of mortgages for home purchases fall into this market segment, and its disruption could result in higher costs and/or reduced access to mortgages for otherwise creditworthy homebuyers. This, in turn, could send ripples throughout the U.S. housing market.

“Going forward, NAR will continue to advocate for an extension of the patch and a permanent solution that will prevent disruption as we work with CFPB to secure stability in the housing market.”


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