There is a collective sigh of relief the morning after the release of the ability to repay standards as reflected by the new qualified mortgage definition. In large part, the QM rule adopts a set of underwriting criteria that is already already standard for most lenders, and excludes certain loan types that have largely been extinct since 2008. The lone new criteria is an arbitrary 43% debt to income ratio requirement, that provides exceptions if the loan otherwise meets the GSEs’ underwriting requirements. In one sentence, the only thing the QM rule seems to, ultimately, exclude are mortgages that are ineligible for purchase by the GSEs where the borrower’s DTI is in excess of 43%. Even then, however, the CFPB is considering additional exemptions for portfolio loans made by smaller lenders.
Of course, one could ask, why there is any rule being established, if in fact it largely mirrors what is already happening in the marketplace? Indeed, there are still many borrowers in urban areas (where there are greater numbers of loans ineligible for purchase by GSEs) who might have a higher DTI, that are going to be adversely impacted by these rules. There is no data I am aware of that suggests these borrowers are somehow inherently more likely to default. The fact is, however, that the CFPB had to draw a line in the sand—so to speak—and we all know from the prior QM versions circulated that lenders could have been looking at restrictions that decimated the housing market and mortgage banking industry.
It appears, rather, that the CFPB was balancing the need to protect the fragile mortgage and housing market with its political mandate to govern lenders. As such, the CFPB drew a line slightly more restrictive on lenders while minimizing the impact to the public. Further, it opened the door to certain lenders (the small guys for a change) to service that portion of the market that now finds itself left out. While few of us involved in the mortgage industry believe at this point that more government mandates are needed or even helpful, we could have been much more upset this morning.