Fannie Mae and Freddie Mac say they’ll adopt new underwriting standards for qualified mortgages on July 1, despite a proposal by the Consumer Financial Protection Bureau to give lenders a reprieve and push adoption back to 2022.
The new rules have been in the works for years, and the Mortgage Bankers Association is in favor of July 1 implementation, saying lenders had been gearing up for it and that the new standards for qualified mortgages will actually increase access to credit.
Drafted in the aftermath of the 2007-2008 mortgage meltdown, the 2014 qualified mortgage rule was intended to discourage lenders from offering risky loans, and encourage them to carefully evaluate each borrower’s ability to repay. Lenders meeting the qualified mortgage (QM) rule receive some legal immunity from lawsuits by borrowers.
One way lenders can meet the QM rule today is to limit the borrower’s debt-to-income ratio to 43 percent. But because that cutoff was seen as arbitrary for some creditworthy borrowers, Fannie and Freddie were granted a “QM patch,” allowing them to purchase and guarantee loans exceeding 43 percent debt-to-income (DTI).
In December, the CFPB revised the qualified mortgage rule, doing away with the 43 percent DTI cap. Instead, lenders will be able to meet QM standards by adhering to restrictions on risky loan products, limiting points and fees, and charging interest rates that are within 225 basis points of the average prime offer rate. The CFPB maintains a price-based approach will encourage competition, and lenders have generally been supportive.
Under the new rules, lenders have to “season” loans with interest rates above 150 basis points, holding them in their portfolios for at least three years, before they can be considered qualified mortgages. According to an analysis by the Urban Institute, the seasoning rule would have applied to only about 1 percent of loans originated from 2013 through 2016, but could increase lending “to racial and ethnic minorities, first-time homebuyers, households with limited means, or others who do not qualify for government-backed lending, including self-employed and gig-economy workers with nontraditional sources of income.”
The new general qualified mortgage rule, announced Dec. 10, will eliminate the need for a QM patch for Fannie and Freddie. The general QM rule is effective on March 1, but wasn’t slated to become mandatory until July 1.
On March 3, the CFPB proposed delaying mandatory compliance to Oct. 1, 2022, “to help ensure access to responsible, affordable mortgage credit and to preserve flexibility for consumers, particularly those affected by the COVID-19 pandemic.”
If finalized, the CFPB said the delay would still give lenders “the option of complying with either the revised General QM loan definition or the General QM loan definition in effect prior to March 1, 2021.”
That’s what Fannie and Freddie plan to do, notifying lenders last week that they’ll start using the new General QM loan definition on July 1.
If Fannie and Freddie stay the course, “as a practical matter many lenders will no longer originate 43 percent DTI ratio QM loans or GSE Patch QM loans for applications received on or after July 1, 2021,” attorney Richard Andreano Jr. of Ballard Spahr LLP wrote in a JD Supra bulletin this week.
Editor’s note: This story has been updated to clarify that mandatory compliance with new underwriting standards for qualified mortgages takes effect Oct. 1, 2022.
