Clock Is Running On The GSE Patch

February 5, 2019 at 9:35 am 1 comment

One of my favorite Assemblymen when I worked in  the assembly was a curmudgeonly fiscal hawk from Long Island who once explained to me that in politics, if you think more than six months ahead you are a visionary. This quote came to mind this morning as I was reading this article from the American Banker explaining why the clock is now ticking for GSE reform whether Congress wants it to or not.

First, let’s take a trip down memory lane back to the regulatory dentist chair that was Dodd-Frank for so many compliance people and legal eagles. Remember that under Dodd-Frank, qualified mortgages are given “safe harbor” protection against claims that a consumer did not have the ability to repay a mortgage loan they were given. The CFPB regulations and congressional statute created maximum debt to income ratios for mortgage loans to qualify as QM mortgages, Congress also said that any loan which that qualify for sale to Fannie, Freddie and other GSE’s would also qualify as QM mortgages.

Fannie and Freddie have taken full advantage of this flexibility. As of December 2018  loans with debt-to-income ratios as high as 50% which meet certain other criteria qualify as QM mortgages. In contrast, under the CFPB’s promulgated regulations, the maximum debt to income ratio is 43%. (See 1026.43)

This is a big deal. Research highlighted by the American Banker indicates that in 2018 29% of loans purchased by Fannie Mae, 24.9% of loans purchased by Freddie Mac and a whopping 55.3% of FHA loans had debt to income ratios above the 43% ceiling.

Which brings us to why the clock is ticking. Dodd-Frank gave Congress eight years to restructure the existing GSE framework. If it does not accomplish this, effective January 10, 2021, the GSE’s turn back into a pumpkin and no longer have the authority to issue loans with D-T-I’s in excess of the general Dodd-Frank caps. Something tells me we’re about to see the start of a giant game of chicken with each side trying to exact desired housing reforms in return for extending the GSE loophole. Unfortunately, as the uncertainty over the exception grows, so to will its potential impact on the mortgage market. Stay tuned.

Entry filed under: Mortgage Lending, Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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