Yes, the patch for Fannie Mae and Freddie Mac from the Consumer Financial Protect Bureau (CFPB) gives some lenders an advantage over other lenders since F&F aren’t covered by the QM’s debt-to-income requirement.
Housing Wire — Four of the largest mortgage lenders in the country are leading a coalition that is calling on the Consumer Financial Protection Bureau to make to changes to the Ability to Repay/Qualified Mortgage rule.
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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.
The Ability to Repay/Qualified Mortgage rule was enacted by the CFPB after the financial crisis and requires lenders to verify a borrower’s ability to repay the mortgage before lending them the money.
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).
Additionally, Fannie Mae and Freddie Mac are not bound this requirement either, a condition known as the QM Patch. Under the QM Patch, loans sold to Fannie or Freddie are allowed to exceed to the 43% DTI ratio.
But some in the mortgage industry, including Federal Housing Finance Agency Director Mark Calabria, believe that the QM Patch gave Fannie and Freddie an unfair advantage because loans sold to them did not have to play by the same rules as loans backed by private capital.
But the QM Patch is due to expire in 2021, and earlier this year, the CFPB moved to officially do away with the QM Patch on its stated expiration date.
And now, a group of four of the 10 largest lenders in the country are joining with some sizable trade and special interest groups to call on the CFPB to make changes to the QM rule in conjunction with allowing the QM Patch to expire.
This week, Wells Fargo, Bank of America, Quicken Loans, and Caliber Home Loans joined with the Mortgage Bankers Association, the American Bankers Association, the National Fair Housing Alliance, and others to send a letter to the CFPB, asking the bureau to eliminate the 43% DTI cap on “prime and near-prime loans.”
As the group states, a recent analysis by CoreLogic’s Pete Carroll showed that the QM patch accounted for 16% of all mortgage originations in 2018, comprising $260 billion in loans.
But the group notes that the QM Patch (or GSE Patch, as they groups refer to it as in their letter) has limited borrowers’ options for getting a mortgage. And the group believes that removing the DTI cap will allow for a responsible expansion of lending practices.
Of course, lenders can always avoid the patch by selling originated loans to Fannie Mae and Freddie Mac.
Laurie Goodman at the Urban Institute has argued that the DTI ratio is misleading. But it is clear from the above chart (produced by George Mason University School of Business finance students) that average DTI has been rising since 2012.
CFPB’s “patch” or briar patch is a form of regulatory arbitrage since lenders can evade regulations but selling loans to Fannie Mae and Freddie Mac.