The Mortgage Lending Rule Change Coming in 2021.

In late July, the Consumer Financial Protection Bureau announced that it will allow the expiration of the so-called “GSE Patch.” The patch is an important provision of the mortgage lending reforms imposed by the 2010 Dodd-Frank Act, which aimed to prevent the predatory lending that fed the 2008 financial crisis. Mortgages issued under the GSE Patch made up 16% of the market in 2018. The Patch will expire in January 2021, according to the CFPB.

One of the most important provisions of Dodd-Frank designates certain mortgages that are protected from lawsuits by borrowers, which rose during the mortgage crisis. These 'qualifying mortgages' (QMs) can't have certain misleading features, and most borrowers must meet a strict debt-to-income ratio. The GSE Patch extends liability protection to borrowers who have a higher debt load, but who still meet the more complex underwriting standards set by Fannie Mae and Freddie Mac (they are considered Government Sponsored Entities, or GSEs, hence the exemption’s name). So under the Patch, lenders are incentivized to give out loans to borrowers who may not quite meet the strictest standards, but who are still a relatively safe credit risk.

Since these rules were set in 2014, almost the entire mortgage market has shifted to issuing some form of qualified mortgage. “If you don’t replace [the GSE Patch] with anything, there’s a big risk that the folks who get their mortgages purely because of the patch won’t get those,” says Kaul, because non-qualifying loans have now become so rare. But the end of the GSE patch is about much more than the future options of borrowers on the bubble. The disappearance of anywhere near 16% of mortgages, Kaul says with some understatement, “could be problematic for the market.”

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Kevin Woo