MBA Letters Address QM Patch, Ginnie Mae Stress Tests

The Mortgage Bankers Association, in several letters yesterday, offered recommendations to the Consumer Financial Protection Bureau on the soon-to-expire Qualified Mortgage “Patch” and to Ginnie Mae on its proposed stress testing framework.

In a Sept 16 letter to CFPB Director Kathy Kraninger, MBA addressed the Bureau’s Advance Notice of Proposed Rulemaking addressing the pending expiration of the Ability to Repay/Qualified Mortgage Rule’s Government-Sponsored Enterprise Patch (https://www.consumerfinance.gov/about-us/newsroom/bureau-releases-qualified-mortgage-anpr/). The Bureau currently plans to allow the GSE Patch to expire in January 2021 or after a short extension, if necessary, to facilitate a smooth and orderly transition away from the Patch.

MBA urged the CFPB to define a plan to continue to serve borrowers after the Patch expires. “The GSE Patch has provided a crucial avenue for mortgage borrowers to obtain safe and sustainable loans unencumbered by the obsolete and burdensome requirements of Appendix Q,” the letter said. “It has also allowed for creditworthy borrowers to receive more affordable credit through prudently underwritten loans that exceed the ATR/QM Rule’s arbitrary 43 percent debt-to-income ratio threshold. Expiration of the Patch without a defined plan to continue to serve these borrowers will have dramatic negative consequences for the housing market, resulting in more expensive or unavailable credit.

MBA offered several recommendations to help guide the Bureau’s work as it undertakes the process of determining how best to replace the Patch, including:

–Expiration of the Patch without necessary reforms to the existing QM general definition would cause significant disruption to the mortgage market.

–Expiration of the Patch may provide some benefits to the housing finance system by eliminating reliance on the GSEs’ credit policies and allowing for a more diverse and stable market that encourages responsible innovation.

–The Bureau should make the following reforms to the QM standard before the expiration of the Patch to achieve the appropriate balance between the Bureau’s dual statutory mandates, which require consumer protection and promotion of the availability of affordable credit.

–Eliminate the rigid 43 percent DTI ratio threshold and Appendix Q, or any reliance on it as a documentary standard.

–If the Bureau retains a DTI ratio threshold despite it not being strongly predictive of repayment ability, allow for the use of other government-approved documentation and verification standards to determine DTI ratios in addition to Appendix Q.
–The reforms described above do not undermine the crucial product feature limitations embedded in the ATR/QM Rule or impact the safe harbor that allows lenders to understand the scope of their liability.

–Any changes to the ATR/QM Rule should be communicated clearly and provide sufficient implementation time to minimize market disruption and consumer confusion.

In a second letter to Kraninger, MBA and 46 state and local mortgage banking associations offered two recommendations they believe are critical to protecting against major disruptions in the market:

–Remove the debt-to-income ratio threshold as a standalone factor in the QM general definition; and

–If DTI ratios remain a factor in any form in the QM general definition, allow for industry-accepted, government-approved alternatives to the income and debt verification standards found in Appendix Q.

“Because of the significance of the QM standard in mortgage lending and investment decisions, any such changes could have a dramatic effect on consumer access to credit and the health of the national housing market,” the letter said.

In the third letter, MBA offered input to Ginnie Mae’s request for a stress testing framework for non-depository issuers. The Ginnie Mae RFI (https://www.ginniemae.gov/newsroom/Pages/PressReleaseDispPage.aspx?ParamID=172) is part of the agency’s continuing efforts to monitor and support the sustainability of its mortgage-backed securities market.

MBA offered several recommendations and observations to improve the value of the Framework to both Ginnie Mae and Issuers:

–Stress test results should be evaluated as one of many sources of information used by Ginnie Mae to oversee its Issuer base. Stress test results should not be used as a standalone factor for any actions taken by Ginnie Mae, but instead should serve as a basis for further analysis and engagement with the Issuer.

–The primary objective of the Framework should not be to grade all Issuers, but instead to identify significant outliers among the Issuer base that appear particularly susceptible to weakness in the event of adverse market conditions. The Framework should not be used to parse differences across Issuers whose results are well within ranges found to be acceptable by Ginnie Mae, including those with results that remain above existing Ginnie Mae required thresholds.

–A rating system as envisioned in the Framework (Pass/Watch/Potentially Non-Compliant/Potentially Deficient) places too great an emphasis on arbitrary thresholds between categories. Instead, Ginnie Mae should focus only on those Issuers that are shown to be significant outliers.

–Ginnie Mae should engage in a constructive dialogue with Issuers whose stress test results identified them as significant outliers to better understand the financial condition and operating model of these Issuers. The stress test results should serve as the basis for further examination rather than a dispositive conclusion.

–Prior to the final implementation of the Framework, the validity of the stress test results should be evaluated across a broad range of Issuers, with a particular focus on ensuring the results are reliable for smaller Issuers or those Issuers with unique business models.

–The Framework should be used in a purely “informational” or “testing” phase for at least two years, in which Ginnie Mae collects and analyzes the stress test results, but does not rely on these results when taking actions with respect to Issuers. This transitional period will allow Ginnie Mae to adjust and fine-tune the Framework to reduce both “false positive” and “false negative” results, while also allowing Issuers to better understand how they fare when subjected to the stress test. By instituting a transitional period, Ginnie Mae would not be limiting its ability to use any existing authorities when needed; it simply would not use the stress test results as a factor when determining whether such actions are necessary during this period.

–Ginnie Mae should ensure appropriate levels of transparency regarding the modeling and inputs that support the Framework.

–Ginnie Mae should ensure strict confidentiality of stress test results.

–Ginnie Mae should ensure that the implementation of the Framework does not divert resources from other important risk mitigation tools, such as fraud identification, improved capacity to manage servicing transfers, and efforts to strengthen liquidity in the market for mortgage servicing rights.

–Ginnie Mae has expressed concern that it has insufficient resources to handle multiple, simultaneous episodes of Issuers in distress. The Framework will be of limited utility in managing this risk, and MBA therefore supports efforts to provide Ginnie Mae with the funding needed to protect taxpayers by deploying robust resolution capabilities during a period of adverse financial conditions.