The GSE patch has been officially extended, this time until the General Qualified Mortgage (QM) loan definition in Regulation Z is amended, the CFPB announced this week.
It had been set to expire on January 10th, 2021 before a proposal to extend it a year ago, but now that a key portion of the rule is expected to change, they’re going to pump the brakes until the final rule is in place.
When that actually happens is unclear, with the bureau simply saying it plans to “issue it at a later date.”
In the meantime, lenders and borrowers won’t have to worry about high DTI ratios, which should minimize any disruption.
However, the CFPB said it wouldn’t amend the provision in Regulation Z that states the GSE patch will expire if Fannie and Freddie exit conservatorship. So it’s possible the patch could expire, though highly doubtful.
Still Working Out the DTI Component
At issue is the DTI component of the QM rule, which caps borrowers’ DTIs at 43%, close to a long agreed upon threshold for sound underwriting established by the mortgage industry.
But to avoid any disruption to the mortgage market, the CFPB allowed for an exemption if the loan was backed by Fannie Mae and Freddie Mac, known as a temporary QM.
This meant such loans would remain unaffected by the rule, at least with regard to a borrower’s DTI ratio.
However, it was only meant to be a temporary measure, set to expire on January 10th, 2021, or on the day when the GSEs finally exited conservatorship, whichever came first.
Of course, the longer mortgage lenders (and homeowners) get used to a rule, the harder it is to rescind it, and that’s why it’s basically becoming permanent.
Not everyone is a fan of removing the max DTI requirement. Back in early 2020, Fitch warned that removing the DTI cap from the QM rule could weaken the quality of such loans.
But most mortgage lenders, real estate agents, and industry lobbyists are obviously for removing it, since it would make mortgage lending cheaper and easier to access.
At issue is what would happen if all of a sudden DTIs were capped at 43% on Fannie- and Freddie-backed loans, which are the lion’s share of originations.
One study found that African American and Hispanic or Latino borrowers would be most impacted, and likely suffer via higher-cost loans, and/or higher mortgage rates due to having higher DTI ratios versus other cohorts.
But ultimately it appears that no one needs to worry because the GSE patch deadline is now a thing of the past.
Whether they get the new rule sorted out before the original cutoff of January 10th, 2021 remains to be seen, but it’s no longer a factor.
This will likely come as a blow for non-QM lenders, who stood to benefit if GSE loans were no longer exempt from the original DTI requirement.
But there are still plenty of instances where a home loan will be designated as non-QM.
(photo: Dafne Cholet)