Earlier this year, the Federal Housing Finance Agency (“FHFA”) issued a Request for Input (“RFI”) on the risks of climate change and natural disasters to the national housing finance markets. The RFI posed 25 questions on how FHFA can best identify, assess and respond to those risks for the entities FHFA regulates (Fannie Mae, Freddie
Since the Inauguration on January 20th, the Biden Administration has busily issued orders to reverse certain policies of the prior administration. In customary fashion upon a change in political parties in the White House, President Biden’s Chief of Staff also sent a memorandum to executive departments and agencies to consider postponing pending rulemakings to allow review by the new slate of policymakers. Among those rules are two Qualified Mortgage (“QM”) Rules of the Consumer Financial Protection Bureau (“CFPB”).
New White House Chief of Staff Ronald Klain’s memorandum specifies that for rules that have already been published or issued but have not yet taken effect, the agencies must consider postponing the rules’ effective dates for 60 days from the date of the memorandum (i.e., until March 21, 2021). If the agency postpones the effective date, the agency must consider opening a 30-day period for interested parties to provide more comments. The memorandum then instructs those agencies to consider whether even further delays are appropriate.
Speaking of engaging interested parties, the CFPB has been reconsidering QM issues for years. The agency has been spurred by a statutory requirement to assess and report on the 2013 QM Final Rule, as well as the January 10, 2021 expiration date of the special QM category for loans eligible for purchase by Fannie Mae or Freddie Mac (the so-called “GSE Patch”). In all, over the course of several years, the CFPB has reportedly received more than 680 comments on QMs from creditors, industry groups, consumer advocacy groups, elected officials, and others. In response to that input, the CFPB issued a final rule extending the GSE Patch until the “mandatory compliance date” of a separate final rule that would revise the general QM category (or until the GSEs emerge from conservatorship), essentially erasing that looming GSE Patch expiration date. Then the CFPB issued two other final QM rules – one to revise the general QM definition and establish that mandatory compliance date, and one to create a seasoned QM category for certain mortgage loans that experience a period of timely payments.
In comparing the effective dates of those rulemakings to the White House’s January 20th memorandum, one can see that the CFPB successfully eliminated the January 2021 GSE Patch expiration date, because that rule became effective before the memorandum. However, the other two rules – which establish the Patch’s new expiration date/Mandatory Compliance Date (July 1, 2021), the new definition of QMs, and the seasoned QM – could get caught in the Biden Freeze.…
Continue Reading Will the CFPB Freeze the GSE QM Patch?
Should US state nonbank mortgage servicers be subject to “safety and soundness” standards of the type imposed by federal law on insured depository institutions, even though the nonbanks do not solicit and hold customer funds in federally insured deposit accounts or pose a direct risk of a government bailout? Well, state mortgage banking regulators think…
As rumored, the Consumer Financial Protection Bureau (“CFPB”) is proposing to revise its general qualified mortgage definition by adopting a loan pricing test. Specifically, under the proposal, a residential mortgage loan would not constitute a qualified mortgage (“QM”) if its annual percentage rate (“APR”) exceeds the average prime offer rate (“APOR”) by 200 or more basis points. The CFPB also proposes to eliminate its QM debt-to-income (“DTI”) threshold of 43%, recognizing that the ceiling may have unduly restrained the ability of creditworthy borrowers to obtain affordable home financing. That would also mean the demise of Appendix Q, the agency’s much-maligned instructions for considering and documenting an applicant’s income and liabilities when calculating the DTI ratio.
The CFPB intends to extend the effectiveness of the temporary QM status for loans eligible for purchase by Fannie Mae or Freddie Mac (the “GSE Patch”) until the effective date of its revisions to the general QM loan definition (unless of course those entities exit conservatorship before that date). That schedule will, the CFPB hopes, allow for the “smooth and orderly transition” away from the mortgage market’s persistent reliance on government support.
Last July, the CFPB started its rulemaking process to eliminate the GSE Patch (scheduled to expire in January 2021) and address other QM revisions. For the past five years, that Patch has solidified the post-financial crisis presence by Fannie Mae and Freddie Mac in the market for mortgage loans with DTIs over 43%. The GSE Patch was necessary, the CFPB determined, to cover that portion of the mortgage market until private capital could return. The agency estimates that if the Patch were to expire without revisions to the general QM definition, many loans either would not be made or would be made at a higher price. The CFPB expects that the amendments in its current proposal to the general QM criteria will capture some portion of loans currently covered by the GSE Patch, and will help ensure that responsible, affordable mortgage credit remains available to those consumers.
Adopting a QM Pricing Threshold
Although several factors may influence a loan’s APR, the CFPB has determined that the APR remains a “strong indicator of a consumer’s ability to repay,” including across a “range of datasets, time periods, loan types, measures of rate spread, and measures of delinquency.” The concept of a pricing threshold has been on the CFPB’s white board for some time, although it was unclear where the agency would set it. Many had guessed the threshold would be 150 basis points, while some suggested it should be as high as 250 basis points. While the CFPB is proposing to set the threshold at 200 basis points for most first-lien transactions, the agency proposes higher thresholds for loans with smaller loan amounts and for subordinate-lien transactions.
In addition, the CFPB proposes a special APR calculation for short-reset adjustable-rate mortgage loans (“ARMs”). Since those ARMs have enhanced potential to become unaffordable following consummation, for a loan for which the interest rate may change within the first five years after the date on which the first regular periodic payment will be due, the creditor would have to determine the loan’s APR, for QM rate spread purposes, by considering the maximum interest rate that may apply during that five-year period (as opposed to using the fully indexed rate).
Eliminating the 43% DTI Ceiling
Presently, for conventional loans, a QM may be based on the GSE Patch or, for non-conforming loans, it must not exceed a 43% DTI calculated in accordance with Appendix Q. Many commenters on the CFPB’s advanced notice of proposed rulemaking urged the agency to eliminate a DTI threshold, providing evidence that the metric is not predictive of default. In addition, the difficulty of determining what constitutes income available for mortgage payments is fraught with questions (particularly for borrowers who are self-employed or otherwise have nonstandard income streams). While the CFPB intended that Appendix Q would provide standards for considering and calculating income in a manner that provided compliance certainty both to originators and investors, the agency learned from “extensive stakeholder feedback and its own experience” that Appendix Q often is unworkable.…
Continue Reading CFPB Hatches a QM Proposal for GSE Patch
In a new era of double-digit unemployment resulting from the COVID-19 pandemic, it may be tough for a mortgage lender to predict the amount and stability of someone’s income in order to determine qualification for a home loan. Neither past nor even present levels of income may be reliable indicators of income levels going forward, at least in the short run or until the economic dislocations are substantially behind us. That is why Fannie Mae and Freddie Mac (the “government-sponsored enterprises,” or “GSEs”) recently issued enhanced documentation requirements and considerations for verifying and predicting the income of a self-employed applicant for a mortgage loan. While the GSEs’ documentation requirements apply via contract to approved lenders/sellers, whether those requirements will morph into legal requirements under the Dodd-Frank Act’s “ability to repay” requirements is something to watch in the coming months.
Revised GSE Underwriting Requirements for Eligible Loan Purchases
A determination of whether an applicant has the ability to repay a loan from his or her income or assets is a basic component of loan underwriting – as required both by federal (and sometimes state) law, and by a lender’s investors or insurers. In addition, federal regulations prohibit a lender of closed-end residential mortgage loans from relying on any income that is not verified by reliable documentation. Predicting whether that income will continue into the future takes skill when lending to self-employed borrowers under any circumstances, and is particularly tricky during this unique coronavirus economy. The now-waning government stay-at-home orders and other quarantining efforts may or may not have affected a particular borrower’s business operations, and the scale and duration of those effects going forward are difficult to predict.
In response to that uncertainty, on May 28, 2020 Fannie Mae and Freddie Mac issued guidance requiring that self-employed borrowers must submit a year-to-date (“YTD”) profit and loss statement (“P&L”) that reports business revenue, expenses and net income.…
Continue Reading Self-Employed Borrowers’ Income – Is the Past Necessarily Prologue?
Today, the Federal Housing Finance Agency (“FHFA”) announced an eagerly awaited policy allowing Fannie Mae and Freddie Mac (the “Agencies”) to address one aspect of the liquidity crisis for mortgage servicers facing mounting advance obligations due to forbearances. Going forward, once a servicer of single-family mortgage loans pooled into an Agency mortgage-backed security has advanced four months of missed payments on a loan in forbearance, it will have no further obligation to advance scheduled payments of principal and interest. The FHFA reports that this applies to all Agency servicers.
This answers one of the four main questions that servicers have asked about forbearance required under the CARES Act in the context of Agency servicing advances. …
Continue Reading Fannie and Freddie to Relax Servicer Advance Requirements for Loans in Forbearance
Residential mortgage loan servicers, trade associations and various members of Congress have been urging the Department of Treasury and the Federal Reserve Board to provide a dedicated servicing advance facility. On April 10, 2020, Ginnie Mae did just that, announcing the terms of its much-anticipated Pass-Through Assist Program for Issuers of mortgage-backed securities that are…
Any day now, maybe even today, Ginnie Mae will announce the details on its Pass-Through Assistance Program (“PTAP”), through which Ginnie Mae will provide a liquidity facility for issuers that need help meeting their obligation as issuers to pass-through payments of regularly scheduled payments of principal and interest, regardless of whether the loans are subject to forbearance. While quickly trying to finalize PTAP program documents, on Monday April 7th, Ginnie Mae announced that it would recognize servicing advance financing facilities under its Acknowledgement Agreement. Previously, Ginnie Mae would not recognize a servicing advance receivable as an independent component of mortgage servicing rights related to loans pooled into Ginnie Mae securities (“MSRs”). This new recognition improves the ability of servicers to finance a valuable income stream, which has proven increasingly costly as the COVID-19 pandemic has greatly challenged liquidity in the housing market. But this recognition comes with limitations, which we detail below.…
Continue Reading Modest Improvements: Ginnie Mae’s Servicing Advance Facility Recognition
We recently discussed the efforts of the Alternative Reference Rates Committee (ARRC) to prepare for the upcoming discontinuance of LIBOR as an index rate for residential mortgage and consumer loans. Our alert examined ARRC’s recommendations regarding an appropriate substitute rate (the Secured Overnight Financing Rate, or SOFR) and ARRC’s recommended changes to implement SOFR. We…
According to the Mortgage Bankers Association, the Consumer Financial Protection Bureau intends to revise its Qualified Mortgage definition by moving away from a debt-to-income ratio threshold, and instead adopting a different test, such as one based on the loan’s pricing. The CFPB also apparently indicated it may extend, for a short time, the temporary QM…