Although the temporary exemption under the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule known as the GSE patch is not set to expire until Jan. 10, 2021, the mortgage industry has been buzzing for years about the impending problems which its removal could cause for credit availability throughout the country.
The worry just became real, as the Consumer Financial Protection Bureau announced it would propose allowing the GSE patch to expire as scheduled, or after a “short extension, if necessary” to allow an orderly transition away from the patch.
“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,” CFPB Director Kathy Kraninger said in a press release announcing the proposed change. “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.”
The GSE patch provides safe harbor status under ATR/QM for loans eligible for purchase or guarantee by Freddie Mac or Fannie Mae. How much could that impact the industry?
CoreLogic’s Pete Carroll earlier this month posted an analysis for the GSE-eligible market, which could have disappeared when the GSE patch expired. In 2018, CoreLogic estimated total origination volume at $1.63 trillion. The company estimated that 16 percent of the market, or $260 billion in originations, was QM-eligible solely because of the GSE patch.
Even giving that a range for margin of error of between $200 billion and $320 billion shows a vast amount of the market which could be impacted when the GSE patch expires in less than two years.
Former Mortgage Bankers Association President and CEO David Stevens directly addressed the concerns over the GSE patch at the association’s Secondary Market Conference in 2016 – five years before the patch was set to expire.
“If we had to underwrite loans solely based on the written QM rule without the patch, and the permanent exemption for the (GSE) programs, credit would be much tighter,” he said at the time. “When the patch expires, or if GSE underwriting changes substantially, a whole segment of qualified potential borrowers will be frozen out of the market. The QM rule needs to stand on its own two feet. It should not be a rule that essentially punts all credit decisions to two companies that are not even regulated by the same agency.”
Earlier this year, the National Association of Hispanic Real Estate Professionals (NAHREP) urged the CFPB to extend the patch. Reiterating arguments expressed by community banks and credit unions, the group asserted that the expiration of the patch would be particularly detrimental to Hispanic homebuyers, asserting that Hispanic often are self-employed, live in multi-generational households and are more likely to work non-traditional, non-W2 jobs.
“The expiration of the ‘GSE QM Patch’ would mean that FHA (Federal Housing Administration) would be the only remaining QM option for working class Latinos, and QM is the only dependable source of lending in the market today,” NAHREP wrote. “This is problematic because oftentimes FHA loans can be more expensive for borrowers. Furthermore, limiting consumer choices can create market distortions that disadvantage private capital and interfere with the competitive nature of the market for these loans. At least for the full period of conservatorship, access to conventional loans should not be made unavailable to creditworthy Latino borrowers based on the application of the 43 DTI ratio alone.”
In its proposal, the CFPB said its five-year assessment released earlier this year showed the GSE patch was working in ways the bureau had not expected when it promulgated the Ability-to-Repay/Qualified Mortgage Rule.
“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,” the proposal stated. “As discussed, the 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 continued prevalence of temporary GSE QM loan originations is contrary to the bureau’s expectation at the time of the ATR/QM Rule.”