The Government Accountability Office (GAO) recommended that the Consumer Financial Protection Bureau (CFPB), the U.S. Department of Housing and Urban Development (HUD) and the other agencies responsible for the mortgage reform provisions (QM and QRM) within the Dodd-Frank Act complete plans to review the effects of those regulations.
In a report titled “Actions Needed to Help Assess Effects of New Regulations,” the GAO found that mortgage market trends generally have been consistent with tighter underwriting standards in recent years, stating that “mortgage origination volume peaked in 2003, sharply declined in 2008 and then remained above 2008 levels (with mixed increases and declines) through 2013 but declined in 2014 — due to declines in refinancing.”
The GAO also found that since 2008, measures of the credit risk of purchase mortgages (such as borrower credit scores and debt-to-income ratios) were consistent with lenders tightening underwriting standards.
“Estimates from the studies we examined pertaining to loans made in recent years suggest that if lenders continued current practices, a majority of loans would meet requirements for QM loans,” the GAO reported, adding that the studies used a variety of methodologies, including trend analysis with historical data, comparisons with established baselines and surveys of market participants.
“Additionally, the different categories under which loans may qualify as QMs also suggest that the QM standards may have minimal effects on loan availability, at least in the short term. That is, not all loans that qualify as QM are subject to the same restrictions,” the report continued, “For example, loans eligible for purchase by the enterprises (Fannie Mae and Freddie Mac) or that have been federally insured or guaranteed are QMs under the temporary category and do not have to be at or under the 43 percent threshold for the debt-to-income ratio.”
The GAO did note that some researchers have estimated that the QM and QRM regulations may have an adverse effect on certain borrowers.
An example given included a study showing that a narrow debt-to-income threshold may disproportionately affect minorities and people living in high-cost areas. “Specifically, the higher cost of housing in certain areas can increase these ratios,” it said. “In addition, some market participants raised the concern that lenders might be restricting lending to borrowers near the 43 percent debt-to-income or the 3 percent points and fees thresholds, out of concern that calculation errors could result in a non-QM loan.”
Some observers noted that because the QM standards do not include a measure of creditworthiness (such as credit score) or a loan-to-value ratio requirement, some QM loans may have characteristics associated with higher default rates, the GAO found.
The CFPB and HUD have begun planning for their reviews of the QM regulations. The CFPB identified potential outcomes, data sources, and analytical methods for examining its QM regulations, but had not finalized its plans. HUD identified outcomes and potential data sources, but had not identified specific metrics, baselines, and analytical methods for examining its regulations.
The agencies responsible for the QRM regulations identified outcomes and potential data sources and analytical methods, but had not yet identified specific metrics and baselines.