The Consumer Financial Protection Bureau (CFPB) caught the attention of the mortgage industry when it announced plans to let the Qualified Mortgage (QM) patch for government-sponsored enterprise (GSE)- backed loans expire. The temporary provision has provided safe harbor protections for GSE loans since 2013.
“As the January 10, 2021, expiration date nears, it’s important the industry and regulators understand the role the patch has played in the mortgage market in recent years to inform how best to transition away from it, while also taking a fresh look at the broader Ability to Repay (ATR)/QM rule,” said Tim Rood, Managing Director, SitusAMC.
The original ATR rulemaking established a prescriptive set of criteria to make a reasonable and good faith determination that a borrower is capable of repaying a loan back. The rule effectively legislates the credit risk a mortgage lender can take and, by extension, which borrowers are “ready” to buy a home with a mortgage, Rood explained. “The results, in both availability of credit and cost to comply with these rules, have been decidedly negative,” he said.
To provide a safe harbor from such potential violations, the CFPB created the QM standard, which sits within the ATR construct. QM loans have “certain, more stable features,” restricting riskier loan types, like negative amortization and balloon payments. QM loans limit a borrower’s debt-to-income (DTI) to 43% and upfront points and fees.
The original rulemaking also included the GSE QM patch, whereby loans backed by Fannie Mae and Freddie Mac are afforded QM safe harbor status. The CFPB, however, did not anticipate the long-term conservatorship of the GSEs, which has contributed to an artificially large population of QM loans.
The ATR and QM Rule Assessment Report explains, “Contrary to the [CFPB’s] expectations at the time of the rulemaking, the GSEs have maintained a persistently high share of the market in the years following the rule’s effective date.” GSE securitizations continue to dominate nearly half of mortgage originations, accounting for roughly 45% of origination volume in 2018, and 46% in 2017.
“Not only does this make the case that housing finance reform is long overdue, it also points to the need to normalize an enormous segment of the mortgage market that will lose its QM status in two years,” said Rood.
Of the estimated $1.63 trillion in originations last year, data suggest approximately 16% was covered by the GSE QM patch. In the absence of the patch, that share equates to $260 billion in non-QM loans.
“How and whether the mortgage market will accommodate a larger volume of non-QM loans remains to be seen,” said Rood. Research shows that non-QM loans made up only 3% of the larger mortgage market over the first three quarters of 2018. “Ideally, we would see a return of private capital, but private label mortgage-backed securities (PLMBS) only accounted for 2% of originations in 2018 and a dismal 0.6% in 2017.”
It appears that the CFPB goal of removing the QM patch is to crowd in private capital and capture the market share the GSEs would have involuntarily surrendered, Rood explained. “However, there’s very little evidence that private capital is willing to tackle that opportunity given the inherent regulatory and litigation risks of non-QM lending as the ATR/QM rules are currently written,” he said.
In the Advanced Notice of Proposed Rulemaking announcing the patch expiration, the CFPB said it “continues to believe, as it did in issuing the ATR/QM rule, that consumers would be disserved if the QM rule [were to] define the limit of credit availability” – as it arguably has since its implementation in 2013.
The CFPB said it was “concerned that, as long as the Temporary GSE QM loan provision continues, the private market is less likely to rebound. Indeed, the existence of the Temporary GSE QM loan provision may be contributing to the continuing anemic state of the private mortgage-backed securities market.”
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