Earlier this summer, the Consumer Financial Protection Bureau announced plans to end its temporary qualified mortgage provision that has, since 2014, applied to certain mortgage loans backed by Fannie Mae and Freddie Mac.
Now, the so-called GSE Patch is scheduled to expire by January 10, 2021.
As explained by FPB Director Kathleen Kraninger: “Loans backed by Fannie Mae and Freddie Mac make up a large portion of the U.S. mortgage market. 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.”
OK, but what does this really mean for the mortgage market?
Inside Nonconforming Markets addressed the topic in a recent issue, writing:
“The Consumer Financial Protection Bureau’s proposal to end the “GSE patch” could significantly boost non-agency mortgage activity. However, the magnitude of the change depends on a number of factors, including whether the bureau makes other adjustments to standards for qualified mortgages.
“The national mortgage market readjusting away from the QM patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protection,” CFPB Director Kathy Kraninger said.
“The temporary patch, created by the bureau in 2014, provides an exception from QM standards for loans with debt-to-income ratio above 43% if they meet certain criteria such as are eligible for sale to the government-sponsored enterprises.
“The patch is currently set to expire in early 2021 or when the GSEs exit conservatorship, whichever occurs first. While some industry participants have been pushing for an extension, the CFPB last week said it plans to allow the patch to expire as scheduled or after a short extension, if necessary, to facilitate a smooth and orderly transition.”
On the one hand, January 2021 is still a long way off. There is plenty that could happen in the 14+ months between now and then.
But, the fact is, the expiration of the GSE Patch represents a significant opportunity for the market.
Just take a look at the trend…
As of right now, the market for GSE mortgage-backed security (MBS) loans with a debt-to-income ratio of greater than 43% is now worth more than $250 billion per year. When the Patch expires in a little over a year, it will create even greater opportunities for this private market to grow.
And that’s when things will really get exciting.
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