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According to Black Knight, August 2019 saw foreclosure starts hit
their lowest level in 18 years. October 2019 saw national delinquency fall
to near the record low, which had just been set in the previous May. ere
are many reasons for this, from a strong economy to the success of the
myriad regulations placed on the mortgage industry following the crisis a
decade ago.
But there is another more surprising
reason. Certain borrowers are not defaulting
in the way Congress expected, specifically
high debt-to-income (DTI) borrowers.
Simply put, the Consumer Financial
Protection Bureau (CFPB) requires lenders
to perform a DTI calculation to assess
the risk of borrower default. e CFPB
prevented lenders, with the notable exception
of the GSEs, from offering qualified
mortgage loans to borrowers with a DTI
ratio higher than 43%, with the theory being,
the lower the DTI ratio, the less chance a
borrower would default.
is, however, has not proven to be true.
In the three years immediately following the
implementation of the Qualified Mortgage
(QM) GSE Patch, which exempted Fannie
Mae and Freddie Mac from the 43%
threshold, the 90-day default rate for GSE
purchase originations with borrower DTI
over 45% was significantly less than the same
originations for borrower DTI between 30%
and 45%. In 2016, for example, the ratio of
default for borrower DTI over 45% was as
little as half that of DTI 30% to 45%.
is pool of high DTI borrowers is by
no means insignificant. It was estimated by
CoreLogic that roughly 16% of all 2018
THE TROUBLE
WITH THE QM
PATCH
Legal Industry Update
NATIONAL FOCUS
By: Paul S. Huntington
