Promulgated in January of 2013 and effective since January 2014, the CFPB’s QM rule was implemented in accordance with ability-to-repay (ATR) provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act. To ensure that borrowers weren’t taking out loans they couldn’t afford, the QM rule requires that lenders can only issue a mortgage if the borrower’s debt-to-income (DTI) ratio does not exceed 43%. At face value this makes sense, but data has shown that the QM rule has done little to decrease risk in the housing market.
Beyond the ineffectiveness of the QM rule, the regulation included wording that exempts Fannie- and Freddie-backed loans from the requirement. Known as the QM patch, this loophole allows those with a DTI higher than 43%—risky borrowers—to obtain loans, with American taxpayers serving as the backstop.
As noted by former CEI Policy Analyst Daniel Press:
This is the worst of both worlds: heavily regulating loans made by the private market, or those with “skin in the game,” while encouraging the government, or those without “skin in the game,” to back more and more risky lending.
Fortunately, the QM patch is set to sunset in 2021 and in a recent release, the CFPB has expressed its intent to allow the expiration without intervention. Federal Housing Finance Agency (FHFA) Director Mark Calabria, the main regulator of Fannie and Freddie, has also echoed the same sentiments; “the QM patch should expire so that we can level the playing field, foster competition in our nation’s housing finance market, and bring us one step closer to comprehensive housing finance reform.” However, the likelihood of such expiration has prompted many to question the future of the GSEs, their balance sheets, and their legal liabilities as they relate to qualified mortgage lending. Some have also expressed concern as to how the expiration would impact low-income families and their ability to get a mortgage.
Treasury is cognizant of such questions and such concerns and details remedies in the reform proposal. Treasury recommends that the CFPB look at “alternative approaches to establishing bright line safe harbors for ATR compliance that do not rely on prescriptive underwriting requirements.”
The alternative approach given the most detail is on Appendix Q—the guidelines used by underwriters when calculating a borrower’s DTI ratio. These guidelines cover full-time work, part-time work, overtime, and retirement. They also cover “the earnings of self-employed consumers, alimony and child support, investments and trusts…” However, Appendix Q fails to take into account those with the non-traditional sources of income common in today’s economy. Neatly summarized by Norbert Michel of the Heritage Foundation: “Many groups have complained that Appendix Q…is difficult to comply with and too inflexible.” Treasury later goes on to write that “Modernizing Appendix Q to address self-employed borrowers, borrowers with nontraditional sources of income, and similar issues would address some of these issues.”
Last Friday marks eleven years since Fannie and Freddie were taken into government conservatorship in the midst of the mortgage meltdown. Yet, the actors at the heart of the financial crisis remain unreformed and seemingly just as dangerous as they were over a decade ago. The reform proposal makes good on the administration’s directive to explore ways to increase competition in the housing market, doing so by advocating for an end to the QM patch and proposing improvements to Appendix Q. To this end, Treasury is working to terminate GSE cronyism while also helping more consumers achieve the American dream of homeownership.