As the expiration of the GSE patch, also referred to as the QM patch, grows closer, the potential impact becomes a more frequent topic around the industry. Having helped deliver the mortgage industry through the financial crisis by allowing the government-sponsored enterprises to accept originations that fall slightly outside of the defined Ability to Repay/Qualified Mortgage Rule credit parameters, the sunset of this safe harbor privilege presents both pros and cons.
The patch has not been a focal point for quite some time. It was implemented with a termination parameter of 1) the end of GSE conservatorships, or 2) January 10, 2021, and certainly no one envisioned that the GSEs would remain in conservatorship for so long. Identified as a key indicator of Ability to Repay, the GSE Patch has facilitate the GSE purchase of over $150 billion of loans with Debt-to-Income ratios in excess of 43%, according to a September KBRA report. CoreLogic reported similar market concentration back in July, stating that the QM patch represented 16 percent of mortgage originations in 2018 for $260 billion.
Moving this issue to the forefront of the industry has put the definition of QM in flux. Coupled with a historically low interest rate environment, these two areas could significantly influence how this story plays out. Definition aside, the end of the GSE QM patch should redirect industry attention to the following areas:
Affordability: First time and low-to-moderate income borrowers may lose access to affordable mortgage loans, whether due a shrinking credit box or rising interest rates, this will almost certainly impact origination volumes.
Debt-to-income ratios: No matter how you analyze the numbers, returning to an industry ceiling of 43% DTI will continue to keep many borrowers out of the homebuying market.
Interest rate impact: Regardless of market rates, reducing GSE market share of non-QM loans will negatively affect interest rates tied to this product as risk is increased without GSE backing. Expanded market competition will help offset this impact but it won’t negate it
Non-QM products: Lenders originating non-QM product are well positioned to see growth. However, inherent risk and cost remain a component of this product stream and if rates increase, these issues will compound themselves.
The Consumer Financial Protection Bureau announced the expiration of the QM patch in late July and simultaneously released an Advance Notice of Proposed Rulemaking in an effort to gain a better understanding of the mortgage industry’s perspective on “the impact on credit, 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.”
Kathleen Kraninger, CFPB Director. This is the right time to help the industry further define QM, address concerns, and identify possible solutions. If your institution is not in a position to respond to the CFPB’s notice, then you can still make a difference by working with trade associations, such as the Mortgage Bankers Association, the American Bankers Association, the National Association of Federally-Insured Credit Unions, and others.
The expiration date is January 10, 2021. As we move closer to this time, Quality Mortgage Services will keep you apprised of changes and the possible impact on your business, to include the direction of trade associations as their efforts are made public. Now more than ever, it’s important to have compliance partners, not just vendors, that understand the nuances of your business as well as the industry. Staying by your side as your institution navigates changes that impact operational strategy and loan quality risks tied to your business’ market, QMS offers a full suite of services that are designed to help your organization address audit and compliance needs in a unique and sophisticated manner.