Election, Supreme Court case may dictate fate of CFPB's QM proposal

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The fate of an important mortgage lending proposal could be determined by a Supreme Court decision due as early as next week and the outcome of the November presidential election.

The proposal at issue, made this week by the Consumer Financial Protection Bureau, would change underwriting guidelines for what constitute ultrasafe “qualified mortgages,” which shield originators from legal liability in their determination of borrowers' ability to repay. The CFPB plans to extend until April 2021 an exemption from strict underwriting guildelines that has given Fannie Mae and Freddie Mac a competitive advantage over private lenders; that exemption is known as the government-sponsored enterprise “patch.”

Home lenders and the National Association of Realtors generally support the proposal as it is seen as a boon to volume and profits. Consumer advocates are concerned that the CFPB’s plan could limit credit to low-income borrowers.

The Supreme Court decision that could have a say in the proposal's future has nothing to do with mortgages, but everything to do with the proposal's author — the CFPB. The case centers on whether the CFPB director can be removed by the president at will. The decision could set a precedent for other agency heads, too, including the leader of the Federal Housing Finance Agency, which oversees Fannie and Freddie in conservatorship.

CFPB Director Kathy Kraninger’s five-year term ends in December 2023, and FHFA Director Mark Calabria’s term ends in April 2024. If the directors of the CFPB and the FHFA can be fired at will by the president, as some believe the high court is likely to rule — and if Joe Biden, the Democratic presidential nominee, wins in November — then it would be easier for Biden to replace appointees at key agencies and all bets would be off on which rulemakings survive under new leadership.

All these matters are coming to a head as the Trump administration is preparing to release Fannie and Freddie from conservatorship and wean the mortgage market off its reliance on selling loans to the GSEs.

“If Biden comes in, he could terminate" Kraninger Calabria "on Day 1 if he wanted to,” said Dave Stevens, the CEO of Mountain Lake Consulting and a former Federal Housing Administration commissioner in the Obama administration. "If both lose their jobs, GSE reform and GSE release all becomes questionable."

As might the CFPB's latest qualified-mortgage proposal, though some observers say it could still go through even if there were a change in the White House in November.

"I do not see the Supreme Court ruling or a potential Biden administration significantly impacting the QM regulation," said Ed Mills, a managing director and Washington policy analyst at Raymond James. "We could see some tweaks, but the end goals seem to be the same — finding a balance between consumer protections and access to credit."

Critics of the plan say there are plenty of reasons for the CFPB to apply the brakes.

“The decision to proceed with this major mortgage rulemaking now is especially concerning because the homeowners most at risk of losing access to affordable and responsible credit under the proposal — people of color and low-income borrowers — are also those most hard-hit by both the COVID-19 financial and health crisis, as well as the last mortgage meltdown during the Great Recession a decade ago,” said Alys Cohen, a staff attorney at the National Consumer Law Center.

The GSE “patch” was created in 2014 to help the mortgage market recover from the financial crisis. It gave Fannie and Freddie an exemption from what were supposed to be tough underwriting guidelines that included a maximum 43% debt-to-income ratio for loans to get a release from legal liability.

Because of the GSE patch, the 43% DTI cutoff never really went into effect. Lenders were able to sell loans with even higher DTI requirements, up to 50% or more, as long as the loans were approved by the GSEs’ underwriting engines.

Lenders have lobbied heavily to eliminate the DTI requirement and other criteria for assessing a borrower’s income, assets and liabilities from the QM rule. The outsize impact of the GSE patch can be found in data showing how many loans would not qualify to be sold to the GSEs if the 43% DTI limit had been in effect. Roughly 3.3 million loans, or nearly 20% of total loans bought by Fannie and Freddie from 2014 to 2018, had DTI ratios of 43% or more, according to the Urban Institute.

The CFPB has estimated that roughly 957,000 mortgages would be affected by the expiration of the GSE patch. If no changes were made, the CFPB said, “after the patch expires, many of these loans would either not be made or would be made but at a higher price.”

Vince Malta, president of the National Association of Realtors, one of the most powerful housing lobbies, applauded the CFPB’s decision “to eliminate a hard DTI standard.”

The CFPB has proposed replacing the DTI limit with a price-based standard in which a loan's annual percentage rate cannot exceed the average prime offer rate of a comparable transaction by 2 percentage points. But that approach has been questioned by both consumer advocates and industry groups.

In the meantime, the CFPB is still asking for comment on alternative approaches.

It could adopt a higher DTI limit, a hybrid that combines a loan’s pricing with a DTI limit or a more flexible standard for calculating a borrower’s income, assets and debts, said Isaac Boltansky, director of policy research at Compass Point Research & Trading.

Notably, mortgage insurers have been among the lone holdouts in the industry against the CFPB’s proposal.

Lindsey Johnson, president of the U.S. Mortgage Insurers, a trade group, wrote in a 19-page letter to Kraninger last year that the trade group was against removing “clear and measurable” underwriting thresholds that lenders have relied on for decades.

Insurers would prefer that the CFPB simply raise the DTI threshold to 48% or 50%, meaning that further changes could be in the offing.

“A loan’s pricing is not always an accurate measurement of credit risk, particularly when pricing can be manipulated by creditors in order to gain QM status,” Johnson wrote.

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Qualified Mortgages GSE reform CFPB FHFA Kathy Kraninger Mark Calabria Coronavirus