DTI ratio is "unworkable and should be removed," says MBA president
The Federal Housing Finance Agency’s recent changes to Fannie Mae and Freddie Mac’s loan-level price adjustments (LLPA) have raised concerns among mortgage industry leaders.
Robert Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), reiterated initial concerns about adding an LLPA based on debt-to-income ratio (DTI), its unfortunate timing and its potential impact on borrowers and lenders.
Operational and quality control issues
The industry leader stated that the DTI ratio is not a strong indicator of a borrower’s ability to repay, and an LLPA based on this ratio would cause difficulties in compliance and bring added complexity to the loan application and underwriting process.
“MBA is particularly concerned about the addition of an LLPA for loans with a debt-to-income ratio greater than 40% and recommends removing it from the enterprises’ pricing framework,” Broeksmit said in a letter addressed to FHFA director Sandra Thompson. “The reasons for introducing DTI ratio in the enterprises’ pricing framework remain unclear. The general qualified mortgage definition was revised to exclude DTI ratio as studies demonstrate that as a stand-alone measure, DTI ratio is not a strong indicator of a borrower’s ability to repay. Further, an LLPA tied to DTI ratio poses a multitude of operational issues and subsequent quality control concerns for lenders.
He explained that a borrower’s income and expenses could change several times throughout the loan application and underwriting process, especially considering the nature of debt and income and the growth in self-employment, part-time employment, and gig economy employment.
“These changes in income and expenses can cause the DTI ratio to fluctuate as items of income and expense disclosed during the application process are later verified during underwriting, which could now result in multiple changes to a borrower’s loan pricing,” Broeksmit said. “Such pricing changes may result in difficult compliance challenges as lenders are forced to evaluate if such changes constitute a valid change in circumstance under TRID, potentially requiring redisclosures and delays in the closing process. In addition to the added level of complexity and scrutiny the DTI ratio LLPA brings to income and expense calculation, lenders are concerned multiple pricing changes could jeopardize borrower trust and lead to the appearance of a ‘bait and switch’ when offering loan pricing.”
Broeksmit added that these changes, coming at the peak of the spring homebuying season in May, will raise costs for borrowers and impose significant operational challenges for the industry. The timing is “especially troubling given current stressed housing market conditions already making affordability a challenge,” he said.
The trade association believes the DTI ratio LLPA is unworkable and should be removed due to its potential to pose operational and quality control issues, complicate compliance challenges, and jeopardize borrower trust.
“It is important to consider how often both monthly income and debt payments change during the loan process and how complex it will be to provide an accurate rate to borrowers given this addition to the enterprises’ pricing framework,” Broeksmit said.
MBA has requested a meeting with director Thompson to further discuss this issue and has offered to gather a small group of lenders to examine the difficulties of implementing a DTI-based LLPA.
Do you agree with MBA? What are your thoughts on the new LLPA changes? Let us know in the comments below.