Fannie Expands the Credit Box Again

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Fannie Mae announced that they are expanding their DU credit box to accept/approve mortgage loans up to 50% total DTI (Debt to Income) ratio, as of July 29^th. Some see this as a good thing.

This means that Fannie will approve loans where the borrowers total recurring monthly debt payments, including the new mortgage payment, equal to 50% of their gross monthly income.

Taking into account what a borrower will also pay in federal, state and local income taxes, plus monthly maintenance costs on their new home, it doesn’t leave them much money for other living expenses.

Freddie has been quietly accepting loans with a 50% DTI for the past 6 years. The agencies say, based on their studies, this should not increase default rates. Based on their criteria for approval, these borrowers should be able to afford the payments and the cost of the new home.

If so, they expect to approve about 95,000 more loans. Just hope the consumers can find affordable homes to buy.

Coincidentally, CFPB is in process of their assessment of the effects of the QM/ATR rules. You remember them, requiring that a lender ensures the borrower’s ability to repay the mortgage granted. Like any lender wouldn’t…

Part of the assessment includes a review of the ‘patch’; the temporary rules that allow a QM safe harbor on loans approved by one of the agencies. That ‘patch’ is due to expire in 2021. When it does, the maximum allowable DTI under the current rule is 43% (not 50%).

Therefore, any loan approved with a DTI above 43% will not receive the QM safe harbor from the repayment ability provisions of the law.

Today, the guidelines for these provisions are loosely outlined under Appendix Q to the rule, which is basically the old FHA underwriting criterion.

CFPB is looking for comments on the assessment process, which includes the effects of the elimination of the ‘patch’. This elimination could have a drastic negative impact on mortgage lending.

On the other hand, continuing to have an exception tied specifically to Fannie’s and Freddie’s guidelines and underwriting criteria means that these agencies can control the secondary markets and lending policies for all mortgage lending. Can you say “Big Brother”?

It’s time to once again get involved to protect the future of our industry. Your input is needed on what can be done to update the QM criteria to bring it more in line with reasonable lending and repayment ability guidelines.

Otherwise, you may find that CFPB, together with Fannie and Freddie, will control mortgage lending.

About the Author

Michael Vitali

Michael L. Vitali – Independent Consultant to the Mortgage Industry Mike Vitali is an independent consultant to the mortgage industry on matters concerning compliance and mortgage lending. He most recently served as the Senior Vice President and Chief Compliance Officer for LoanLogics, monitoring regulatory developments and their practical implications for the mortgage lending industry. His duties included research, interpretation, and analysis of existing and proposed legislation related to the industry in support of recommendations for policy and/or procedure changes to maintain continued quality and compliance with all applicable laws, rules and regulations, investor requirements, and standard mortgage practices. In his more than 40 years in the mortgage industry, in senior level management, he has gained experience in all areas of mortgage lending, risk management, and compliance. Mike is a past President of the MBA of Greater Philadelphia, is a charter member and was the second Chairman of the MBA of Pennsylvania, and a past board member and Legislative Chair of both associations. He is a recipient of the 1998 Mortgage Banker of the Year Award from the MBA of Greater Philadelphia, and the 2003 Chairman's Award from the MBA of PA, and currently serves on several compliance related task forces for MBA.