How vital is the QM Patch?

Many industry groups have slammed the CFPB’s plan to do away with the patch – but one expert says it may be time to eliminate the exception to the QM rule

How vital is the QM Patch?

Should the “QM Patch” stick around, or go the way of the dodo? That’s been a topic of heated debate in the mortgage industry since the Consumer Financial Protection Bureau moved to eliminate the patch.

Some industry bodies, including the National Association of Realtors and the National Association of Hispanic Real Estate Professionals, have come out in opposition to the move. But Tom Hutchens, executive vice president of production for Angel Oak Mortgage Solutions, said that the patch may be an idea whose time has passed.

“This QM patch is getting a lot of press and a lot of discussion,” Hutchens told MPA. “There’s maybe some confusion on what the QM patch really is.”

The QM Patch – also known as the “GSE Patch” – is basically an exception to the Qualified Mortgage rule that allows Fannie Mae and Freddie Mac to approve loans with higher debt-to-income ratios than would otherwise be allowed under QM guidelines, which limit a borrower’s DTI to 43%.

“Basically, when the QM designation came into being, the regulators said, ‘This 43% DTI might really hurt the housing market. Let’s give Fannie Mae the ability to approve over-43%-DTI loans, but still get the QM designation,’” Hutchens said. “They’ve basically been able to turn non-QM loans into QM loans – but that goes away if the QM Patch goes away.”

High-DTI loans have become increasingly common as house prices have risen; 30% of GSE-backed loans had DTIs higher than 43% last year, according to a Bloomberg report. However, Hutchens said eliminating the patch would not be the apocalyptic move some housing groups have made it out to be.

“Every borrower who has a 43 DTI and below – I think that’s 75% to 80% – will be fine. That riskiest 20% will still be able to apply for a mortgage – they’ll just be getting a non-QM loan,” he said. “They’ve already been qualifying for a non-QM loan, really – they’ve just been getting QM financing.”

While the patch may have once been useful, Hutchens said, the resurgence of the non-QM space makes it unnecessary.

“At the time of the QM designation, there was really no private capital in the non-QM space,” he said. “But fast-forward five years, and Angel Oak and others have worked hard to bring private capital into this space. These borrowers can still get loans through that private capital. That just wasn’t the case in 2014.”

And Hutchens believes that private capital is a better option for high-DTI loans.

“The GSEs were never really set up to provide loans to riskier borrowers,” he said. “These are loans that come with a government performance guarantee. Should they really be doing risky loans when the government guarantees their performance? I believe private capital is really the best market for riskier loans, because that risk is factored into the equation. I just think the private market does a better job of weighing risk.”