Dive Brief:
- The Consumer Financial Protection Bureau (CFPB) said Thursday that it won't renew an exemption that lets Fannie Mae and Freddie Mac work with risky borrowers. The CFPB requires lenders to verify borrowers’ ability to repay. But under the government-sponsored enterprise (GSE) "patch," mortgages backed by Fannie and Freddie are "qualified mortgages," which allow borrowers to access credit if their debt-to-income ratio is beyond 43 percent. The rule, which took effect in 2014, is set to expire in January 2021, or when Fannie Mae and Freddie Mac exit conservatorship.
- Approximately 19 percent of GSE-backed loans took advantage of the patch from 2014 to 2018, the Urban Institute wrote in March. Some in the mortgage industry argue the patch makes competition more difficult because of the edge it gives Fannie and Freddie. Others say if the patch expires, the affected loans would incite legal challenges that could throw the mortgage market into disarray. The Urban Institute says ending the patch would put homeownership out of reach for many minority and low-income buyers, whom the patch disproportionately serves.
- The CFPB's advanced notice of proposed rulemaking (ANPR) on Thursday sought public comment on several amendments to the qualified mortgage rule, including whether "mortgage" as defined in Regulation Z should be revised. The agency also sought input on altering the debt-to-income limit. However, the notice did not put the patch up for comment.
Dive Insight:
The CFPB may consider a short extension of the patch to "facilitate a smooth and orderly transition," the agency's director, Kathy Kraninger, said Thursday at a press announcement. But she emphasized a commitment toward moving away from the patch. "We could have said nothing," Kraninger said.
"I ultimately believe Fannie and Freddie should play by the same rules as everyone else," said Mark Calabria, director of the Federal Housing Finance Agency (FHFA), who also attended the press announcement. The FHFA regulates Fannie and Freddie. "The reason for the ANPR now is to learn what we need to do to minimize market disruption," Calabria said.
He said the patch "exacerbates an unlevel playing field," and ending it is "a critical component of moving toward a competitive mortgage finance system."
More loans have exceeded the 43 percent debt-to-income limit in recent years, Calabria said, suggesting Fannie and Freddie are taking on more risk.
He said he does not think the patch's expiration will cut into Fannie and Freddie's market share. "I suspect a lot of originators are used to dealing with Fannie and Freddie, and they'll stick with Fannie and Freddie," Calabria said.
