According to the Consumer Financial Protection Bureau’s (CFPB) Qualified Mortgage (QM) rule, all the mortgages that can be eligibly bought by Fannie Mae or Freddie Mac are exempt from the 43% debt-to-income cap. This exemption is referred to as the GSE patch (GSE stands for government-sponsored enterprises). The GSE patch is slated to expire on 10th January 2021.
Convinced that both Freddie Mac and Fannie Mae benefit from a competitive advantage in underwriting, CFPB now proposes to extend the GSE patch and also make changes to the definition of QM.
Loans that have been underwritten for the GSEs have automatically been considered as qualified mortgages irrespective of whether they meet the 43% DTI criteria. CFPB believes that once the patch expires, close to a million loans would come under soup for failing to meet the DTI cap.
The CFPB proposes to get the 43% cap increased to a range between 45% and 48%. It has also called for a hybrid approach based on a less rigid definition of income and debt. According to the CFPB, something like a price-based threshold is also a good idea.
To define, a price-based threshold could be arrived at by judging what’s a comparable transaction based on a loan’s average prime offer rate/ set against its annual percentage rate. For a loan to be regarded QM, the APR cannot exceed the average prime offer rate by more than two percentage points (as on the date of setting the interest rate).
“The Bureau is proposing to replace the Patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them,” said CFPB Director Kathy Kraninger in a press release. She further said, “The GSE Patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets.”
Of course, even with ‘43’ gone, lenders will be well-advised to look keenly and verify a borrower’s assets, debts, and income.