Posts tagged ‘GSE patch’

CFBP Extends QM Compliance Deadline

The increasingly drawn out fate of regulations creating a new definition of what qualifies as a Qualified Mortgage took another turn this week when the CFPB announced that it was extending the deadline for compliance from July 1,, 2021 until October 1, 2022.  This is good news especially for those of you intending to sell mortgages to the secondary market.  As I explained in a recent blog, the GSE recently put its partners on notice that without a change to the deadline it would not accept for purchase mortgages which qualify under the existing QM patch with its higher debt-to-income parameters. 

The preamble to this announcement includes this graph demonstrating just how dependent the housing market remains on access to the GSEs even as private label securitization continues to recover.

Second Circuit Examines Standing In Data Breach Cases

I will be delving into this more extensively next week but I did not want this week to end without informing my faithful readers that the U.S. Court of Appeals for the Second Circuit has decided an important case in which it explains the circumstances under which individuals whose data has been exposed to theft by unauthorized third parties can bring lawsuits in New York federal courts.  The case is McMorris v. Carlos Lopez & Assocs., LLC .

On that note, enjoy your weekend.  Yours truly will be paying for his first haircut and shave in about 16 months.

April 30, 2021 at 9:58 am Leave a comment

CFPB Grants A Stay of Execution to GSE Patch

One of the biggest issues in the mortgage industry is the approaching expiration of the so-called GSE Patch on January 10, 2021. The patch refers to regulations which stipulate that any mortgage sold to Fannie Mae or Freddie Mac is automatically a qualified mortgage. Yesterday, the CFPB issued a final regulation which will extend the GSE Patch past its expiry date, but there’s a catch. The patch will only last until a new regulation doing away with it takes effect sometime next year. 

There’s actually more going on here than a simple question of extending an expiring regulation. Under the CFPB’s regulations, in order for a mortgage not being sold to the GSEs to be considered a qualified mortgage, it cannot exceed a 43% debt to income limit. In addition, Appendix Q imposes strict guidelines on how that debt and income is to be determined. At the time these regulations were promulgated, the CFPB considered using criteria other than DTI, or utilizing a higher debt to income threshold. 

In June, the CFPB proposed a replacement to the GSE Patch. Under this proposal, debt to income would be replaced as a condition. Instead, a mortgage would be considered a qualified mortgage “only if the APR exceeds APOR for a comparable transaction by less than two percentage points as of the date the interest rate is set.” To be clear, this is just one of several conditions that would have to be satisfied. This regulation has not been finalized yet, but it will be in the coming weeks. Under the initial proposal, which could of course change in the final regulation, the new definition of qualified mortgage would take effect six months after the regulation is enacted. This proposal also undoubtedly warms the heart of those who want to see the outsized role that the GSEs play in the mortgage market reduced, since it would end a built in regulatory advantage they currently have.

 Like everything else, the election hangs over this proposal. If Joe Biden wins the presidency, you can bet that one of the first things a new CFPB Director will do is put a hold on all pending regulations. But in the meantime, you should at least start considering how your credit union would be impacted by this new QM rule. Six months isn’t that much time to prepare

October 21, 2020 at 9:55 am Leave a comment

CFPB Proposes Alternative to the GSE Patch

With a January 21st statutory deadline fast approaching, the CFPB yesterday put forward a set of regulations which could have a dramatic impact on the mortgage industry.

Dodd-Frank and its accompanying regulations provide mortgage lenders with enhanced legal protections in the event that they must foreclose on a property.  For a mortgage to be classified as a Qualified Mortgages (QM), it must, among other things, have a debt-to-income ratio no higher than 43%.  Alternatively, any mortgage eligible for sale to Fannie Mae or Freddie Mac also qualifies as a QM mortgage even though the GSE’s have GTI ratios exceeding 43%.

The drafters of Dodd-Frank put the GSE exception into statute so that policy makers would have enough time to gradually ween the mortgage industry off of its GSE dependency.  The Dodd-Frank GSE authorization expires in January 2021 and, according to the CFPB, there are still 957,000 loans which qualify as QM loans because they are eligible for sale in the secondary market.  Consequently, without the GSE option, home buying is going to be a lot more expensive for a lot of lower income Americans.

Yesterday the GSE unveiled its post January 2021 proposal.  Based on the summaries I have read, including a statement from the CFPB, the Bureau is proposing doing away with the 43% DTI ratio and replacing it with a price based approach similar to that which is already in use for other categories of loans.  Specifically, whether or not a mortgage qualifies as a QM would be determined by comparing a loan’s annual percentage rate (APR) to the average prime offer rate (APOR) for a comparable transaction.

In a separate rulemaking, the CFPB is proposing extending the existing GSE authorization until April 2021.  In other words, after an election in which the future of the CFPB will be debated.  Needless to say, if you are looking for regulatory certainty in the mortgage market over the next year, you are in the wrong country.

June 23, 2020 at 9:28 am Leave a comment

Treasury Releases its Post-GSE Blueprint and Why it Matters

Yesterday, the Treasury Department unveiled its long-awaited vision of a post-GSE housing market. Here are my initial takeaways:

  • RIP to “the Patch.” As I explained in previous blogs, Dodd Frank authorized mortgages eligible for sale to Fannie or Freddie to be classified as “Qualified Mortgages.” This is an important designation, as it provides mortgage holders a presumption that the borrower had the ability to repay a mortgage loan should it have to be foreclosed on. To the surprise of no one, the report recommends that this important exception for the GSE expire. The CFPB is already preparing for a post-Patch world. The Patch is set to die in July 2021.
  • Fannie and Freddie would become recapitalized entities, no longer having a government charter with the implicit backing of the U.S. Treasury. In addition, the Treasury recommends that Congress encourage the creation of competitors to the GSEs. To ease the barrier of entry into the industry, it suggests that Fannie and Freddie would have to make some of their proprietary information available to the public. This idea intrigues me as I think it’s an approach that should be used in many other big data contexts, but that’s a blog for another day.
  • One of the primary concerns of credit unions and community banks is that a world without Fannie or Freddie would be a world in which they could not cost-effectively and competitively sell mortgages. The big guys with their volume will always be able to undercut smaller institutions. To address this issue, the Treasury recommends that the new GSE-like institutions be required to purchase mortgages for cash and give the seller the option of whether or not to sell their servicing rights. The buyers would also be prohibited from offering volume discounts.

What does all of this mean? Realistically, there is no way that serious housing reform will be undertaken before the November 2020 election. That being said, the demise of the Patch gives whoever is in power real leverage to get Congress talking following the election. Translation: expect housing reform to be the top issue following the next election and at least some of these ideas to gain traction.

On that note, enjoy your first weekend of football. Let’s hope for real lousy weather on Sunday so that those of us committed to forgoing any physical movement or interaction with the family for approximately the next 22 Sundays don’t have to feel too guilty.

September 6, 2019 at 8:54 am Leave a comment

Clock Is Running On The GSE Patch

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.

February 5, 2019 at 9:35 am 1 comment


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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