The Consumer Financial Protection Bureau's mortgage insurance rule remains a political soccer ball after the agency's decision to postpone an important compliance appointment.
Some have praised the decision to postpone the entry into force date for the qualifying mortgage standard revision to October 2022. Others fear, however, that this is a precursor to further changes in the QM framework, which has evolved since 2014.
"The prospect of the CFPB revising the final QM rule is putting the mortgage industry in limbo," said Quyen Truong, partner at Stroock and former CFPB deputy director and deputy general counsel. "Now they have uncertainty about the future and the prospect of more demanding requirements."
The compliance delay will extend an exemption from the QM rule for Fannie Mae and Freddie Mac-sponsored loans, just as the CFPB was on the cusp of removing lenders from this special treatment.
The current framework recognizes loans with a debt-to-income ratio of less than 43% as qualifying mortgages that are protected from liability. The government sponsored company exemption known as the "GSE" patch "allows QM loans that are supported by the GSEs to have higher DTIs.
Some observers welcomed the CFPB's delay, saying that removing the GSE patch could cause further disruption in an already volatile real estate market.
To replace the patch but make the transition easier for GSE-backed lenders, former CFPB director Kathy Kraninger has essentially rewritten the QM rule.
Instead of the DTI limit, all lenders had to adhere to a price-based threshold in order to achieve QM status. The new QM standard was optional at the beginning of this month. It had previously been set to become mandatory in July at which point the patch would go away.
However, some observers say that by delaying the mandatory deadline and removing the patch by a year and a half, incumbent CFPB director Dave Uejio essentially allowed for further easing of the underwriting requirements as riskier loans can be viewed as QM.
Flexibility with more options
Through the 2022 deadline, lenders have the flexibility to achieve QM by either using the patch, meeting the 43% DTI limit, or using the new price threshold.
"Some of those non-QM loans are now being added to the QM area," said Ron Haynie, Senior Vice President, Mortgage Financing Policy at Independent Community Bankers of America like using the old QM or the new QM. "
Still others welcomed the delay, saying that removing the patch could cause further disruption in an already volatile mortgage market. A rise in interest rates should slow the refinancing boom, one of the few economic bright spots during the coronavirus pandemic.
"The patch was a valuable tool and we may not be ready to fix it," said Carrie Hunt, executive vice president of government affairs and general counsel for the National Association of Federally-Insured Credit Unions.
Many were surprised at Uejio's U-turn. The agency has long wanted to get rid of the GSE patch, but the extension means that loans with higher DTIs will still be QM. Around 30% of the loans covered by Fannie and Freddie have DTIs above 43%.
The QM rule defined under Kraninger was largely supported by banks and mortgage lenders. Without the changes, the elimination of the patch would mean that a large proportion of the loans supported by GSE with high DTIs would lose QM status. The new price threshold was seen as workable. Loans with annual percentages that are no higher than 2.25 percentage points above the average Prime Offer Rate receive QM status.
"It was a good fix for the patch going away," said Pete Mills, senior vice president at the Mortgage Bankers Association, of Kranninger's rule.
He added that the delay raises the question of whether the GSE exemption will last indefinitely and the CFPB will consider additional QM changes.
"It is currently not clear whether the patch will be available any longer," said Mills. "This brings a certain amount of uncertainty into the market as [the CFPB] may now be tinkering with the final QM rule."
However, NAFCU's Hunt said the agency needed to take into account the oversized role of GSEs and the need for smaller institutions to have more flexibility in lending.
"Market stability and maintaining the status quo are incredibly important as credit unions give out credit that doesn't fit the traditional definition of QM because we're trying to reach people who may be on the fringes," she said.
However, the delay in the QM rule will likely be challenged once Uejio's announcement of the proposed rule-making is complete.
The CFPB proposed postponing the mandatory QM rule compliance date "to ensure access to responsible, affordable mortgage credit and maintain the flexibility of consumers, particularly those affected by the COVID-19 pandemic".
The CFPB plans to evaluate the QM rule and will check at a later date whether further rules should be introduced.
The price threshold debate continues
Some who supported Kranninger's rule were relieved that the agency was still leaving the new APOR standard on the table for the time being.
"To the extent that there is a silver lining here, the CFPB has kept the price-based approach," said Karan Kaul, senior research fellow at the Urban Institute's Housing Finance Policy Center.
The APOR threshold was seen as shot in the arm for jumbo lenders and non-banks like Detroit-based Rocket Mortgage, the major online lender formerly known as Quicken Loans. Many large non-banks launched loan programs before March 1st to meet the new pricing requirements.
"It's very positive for the industry, especially during the optional period, as there are now more methods for QM [Status] with the [GSE] patch and APOR," said Scott McNulla, Senior Director of Regulatory Compliance at SitusAMC. He added, "Jumbo loans across the board have greater flexibility to become QM loans."
"We will see some expansion of non-QM lenders who can now issue a QM loan based on APOR," said McNulla.
However, others see loan pricing as the wrong way to determine a borrower's ability to repay.
"Pricing has nothing to do with a borrower's ability to repay," Haynie said. "Pricing can be manipulated and is manipulated to get as many credits as possible in order to get QM Safe Harbor treatment." And no threshold for the DTI ratio means these loans can be 100% DTI. "
Others are concerned about the role of DTI metrics in mortgage lending in general and whether they will fall out of favor.
"There's a lot of confusion that DTI would go away," said Kaul. "DTI plays a central role in mortgage underwriting even without a hard cap of 43%."
The CFPB could open the door to other alternative approaches to the QM rule over the next 18 months, examining the data and the mortgage market's response to the easing of underwriting rules.
"As long as you have both the GSE patch and the APOR-based QM, there is more leeway for lending," was Truong saying the rule? "