Bye bye, DTI?
A major industry player is urging the CFPB to remove DTI requirements from its qualified mortgage rule once the so-called “QM patch” comes to an end in 2021. According to its data, DTI “is a weaker predictor of default than other risk measures” and “its centrality to the current QM rule distorts the market by misrepresenting true loan risk.”
A chance to make a change
The statements come from a comment letter issued by the Urban Institute to the Consumer Financial Protection Bureau last week. The Urban Institute, a nonprofit economic and social policy research firm, says the 2021 expiration of the QM patch is “an opportunity to update the qualified mortgage rule to make it work better for future borrowers.”
For background, the QM patch allows borrowers to exceed the qualified mortgage rule’s threshold for DTI (43 percent) on Fannie Mae and Freddie Mac-backed loans. The CFPB announced it does not intend to extend the exception once it expires in January 2021.
“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,” CFPB Director Kathleen Kraninger said back in July.
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Eliminating DTI requirements
The Urban Institute’s policy experts seem to agree. In fact, they think a post-patch QM rule needs to remove DTI thresholds altogether.
“As a single-dimensional variable, the DTI ratio by itself does not capture credit risk comprehensively,” the Institute’s comment letter reads. “We showed that FICO scores and loan-to-value ratios better predict default than DTI ratios.”
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According to the Institute, rate spreads are a better predictor of default than DTIs and predict it “with greater precision.”
Others in the industry have agreed about eliminating the DTI as a standalone test, including the Mortgage Bankers Association and the AEI Housing Center.
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