The QM Patch
OK, I admit it. I thought a QM Patch was some sort of a hipster mustache (or a "moustache" for you true hipster devotees). But it's not, and I see now why the CFPB's announcement of an ANPR (Advance Notice of Proposed Rulemaking) yesterday is such a big deal.
The QM Patch essentially says that a "Qualified Mortgage" (QM) loan can exceed 43% DTI as long as it is approved by Fannie Mae or Freddie Mac (and meets other requirements of QM). The QM Patch is a hall pass for the GSEs to underwrite mortgage loans that technically violate Dodd-Frank rules because they are under the control of the federal government via conservatorship (ie., Fannie = Jane, Freddie = Michael, HUD = Mary Poppins, Bert = Ben Carson?).
But the QM Patch was only allowed as long as Fannie and Freddie were under the purview of HUD or until 2021. Since the GSEs don't seem to be in any rush leaving conservatorship, the CFPB appears to be putting their foot down and telling them to shave off that ridiculous QM Patch on their face (but they still get a spoonful of sugar to help the medicine go down).
The ANPR effectively says that the federal government is going through with the expiration of the QM Patch on January 10th, 2021, and that they're open to hearing ideas on how to wind down the rule exception (with some leeway for temporary extensions beyond that date).
The argument is that the private market can serve those borrowers that exceed 43% DTI without harming the housing finance market or consumers. These QM Patch loans are estimated to make up between 25-30% of GSE volumes, or about $185 billion in annual originations. If all of this volume goes to the private sector, what does that mean for the mortgage market and for you as a mortgage broker?
Expect to see talking heads conjure up both fantastic dreams as well as nightmares that hearken back to the early 2000s. It's likely the truth will lie somewhere in between, but consider the QM Patch to be a gauntlet thrown into the 2020 elections as a by-product of homeownership and affordable housing policy debates.
Now, can we do something about soul patches?