Some members of the Housing Lobby propose substituting QM’s existing “Average Prime Offer Rate” (APOR) structure for the current QM “Patch”, which sunsets in January 2021. This approach, like the Patch itself, is fatally flawed, according to report authors.
- It is well documented that the Patch, announced in January 2013, has pro-cyclically supported the current home price boom, with the impact most pronounced for entry-level homes.
- Supporters claim it serves as a proxy measure of credit risk inherent in a loan. This claim is unfounded for two simple reasons. First, due to federal housing policy, almost all home purchase loans are either generally not priced for risk (FHA) or subject to substantial cross-subsidies, which result in low-risk loans being overpriced and high-risk ones being underpriced. Further, regulations currently exempt all five agencies from QM’s 43% debt-to-income (DTI) limitation. Second, HUD, in its QM rule, redefined the rebuttable presumption rule with regard to ability to repay, making it is extremely difficult to overcome the presumption of compliance. Lenders exceeding the APR limit effectively get protections similar to the safe harbor.
Thus substituting QM’s existing “Average Prime Offer Rate” (APOR) structure for the current QM “Patch” would not serve as a proxy measure for inherent credit risk. As a result, the APOR based approach would continue to pro-cyclically support the current home price boom, which started in 2012.
The preferable alternative is to allow the patch to sunset as scheduled, thereby subjecting the GSEs to the 43% DTI limit, and for FHA to move away from its 57% DTI maximum to say 50%. The resulting counter-cyclical friction to home prices, particularly entry-level ones, would keep prices more affordable and sustainable for consumers, and much more in synch with wages. The APOR test provides no such friction and won’t for many years, and would have the opposite effect: less affordability and higher risk.
The sun setting of Patch’s DTI advantage bestowed on the GSEs in 2013, would be the prudent way to create a more level playing field between private and government players and reduce GSE control over the marketplace.
