CFPB’s Patch Expiration Should Sound Alarms to Mortgage Lenders

“The national mortgage market readjusting away from the patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protection,” CFPB Director Kathy Kraninger said in a press release announcing the proposed change. “We want to hear all perspectives on how to move beyond the GSE patch, the impact on credit, the 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. The bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE patch.”

Yesterday’s announcement from the CFPB announcing the expiration of the “patch” should send alarm signals to mortgage lenders, especially those without a balance sheet. I would not simply assume this will get fixed, and given the ANPR, this could take the full 18 months remaining in the rule to try to get this right.

Without a rewritten rule this move could be the first move by the administration to intentionally shrink the footprint of the GSEs.

As this piece from Cowen’s Jaret Seiberg points out, without a rewritten rule this move could be the first move by the administration to intentionally shrink the footprint of the GSEs.

Per Seiberg: “We believe this is the first concrete move by Team Trump to shrink the enterprises. That should be significant as investors try to decide whether to recapitalize Fannie and Freddie as smaller enterprises are likely to generate less revenue. In our view the market will want to better understand the ramifications of ending the QM patch on Fannie and Freddie before they commit upwards of a $100 billion to recapitalizing them. It is another reason why we believe recap and release will not happen quickly though it is inevitable.”

For IMBs and other non bank lenders in particular it should be a priority to advocate to the bureau and other policy makers that a new rule needs to be written, one that will fill the void that will be created by the end of the rule. For Banks and other lenders that rely on an exit strategy though the secondary market an end to the patch, should a replacement rewrite of the rule not be sufficient, the likelihood is that FHA will expand barring any changes to their underwriting polices. It is almost certain that any rewrite to the rule will still result in credit terms more restrictive than those that are available via the patch.

This announcement, despite laying the foundation for new rule-making, requires that this policy issue immediately be moved to the top, or near top, of the priority list.

I raised this concern years ago, as reported today by the Dodd-Frank Report: “Former Mortgage Bankers Association President and CEO David Stevens directly addressed the concerns over the GSE patch at the association’s Secondary Market Conference in 2016 – five years before the patch was set to expire.”

“If we had to underwrite loans solely based on the written QM rule without the patch, and the permanent exemption for the (GSE) programs, credit would be much tighter,” he said at the time. “When the patch expires, or if GSE underwriting changes substantially, a whole segment of qualified potential borrowers will be frozen out of the market. The QM rule needs to stand on its own two feet. It should not be a rule that essentially punts all credit decisions to two companies that are not even regulated by the same agency,” stated Stevens.

I assume that the MBA is aggressively pursuing this but this should be an effort for all relevant trade groups to get behind as it will affect mortgage credit access especially for first time buyers and the self employed. Strong statements in the press from industry about the need to replace the patch with a rule that does not expose lenders to an adverse legal rebuttable presumption risk is necessary to protect access to homeownership.

Keep in mind, conservative think tanks like AEI and CATO likely are supporting the elimination of the patch and would like to see a reduced alliance on government supported loan programs.

 

 

Dave Stevens

David H. Stevens, CMB, has held various positions in real estate finance, including serving as SVP of Single Family at Freddie Mac, EVP at Wells Fargo Home Mortgage, President and COO of the Long and Foster Realty Companies, Assistant Secretary of Housing and FHA Commissioner, CEO of the Mortgage Bankers Association.