Somehow, the qualified mortgage (QM) rules have become even more complicated. Our Financial Services & Products Group parses how the death of the QM Patch will affect creditors seeking to originate residential mortgage loans under Fannie Mae, Freddie Mac, or Consumer Financial Protection Bureau regulations.
1) QM Patch loans are no longer eligible for purchase or guarantee by Fannie or Freddie
2) 5 options for creditors originating QM loans
3) What are the revised QM loan rules?
Whether they realize it or not, absent a last-minute intervention from the Federal Housing Finance Agency (FHFA), effective July 1, 2021, creditors will no longer be able to originate qualified mortgage loans using the “QM Patch.” The reason for this dramatic event is that on April 8, 2021, Fannie Mae and Freddie Mac announced in separate pronouncements that effective for loans with application dates after June 30, 2021 (for Fannie Mae; for Freddie Mac, applications received on or after July 1, 2021), the loans must conform with the revised qualified mortgage (QM) loan rules—and cannot be QM Patch loans. Stated another way, since the FHFA is terminating the QM Patch, loans underwritten to the QM Patch after July 1, 2021 will no longer be eligible for sale to the government-sponsored enterprises (GSEs), and in effect, the QM Patch disappears after that date. This development contradicts the Consumer Financial Protection Bureau’s (CFPB) final rulemaking delaying the mandatory effective date of the revised QM rules until October 1, 2022. Under that CFPB rulemaking, during the period between March 1, 2021 and October 1, 2022, the CFPB intends for creditors to have the option of originating QM loans either under the legacy QM rules, including the QM Patch, or the revised QM rules.
Background
On December 10, 2020, former CFPB director Kathy Kraninger issued the revised QM rules that replaced Appendix Q and strict 43% debt-to-income ratio (DTI) underwriting threshold with a priced-based QM loan definition. The revised QM rules also terminated the QM Patch, under which certain loans eligible for purchase by Fannie Mae and Freddie Mac do not have to be underwritten to Appendix Q or satisfy the capped 43% DTI requirement. The rule was to take effect on March 1, 2021, but compliance would not be mandatory until July 1, 2021. Under the rulemaking, the QM Patch would have expired on the earlier of July 1, 2021 or the date that the GSEs exit conservatorship.
On April 27, 2021, the CFPB promulgated a final rule delaying the mandatory compliance date of the revised QM rule from July 1, 2021 to October 1, 2022. Notably, under this rule, the QM Patch is extended to October 2022, which gives creditors the option of originating QM rules under either the legacy QM rules or the revised QM rules between March 1, 2021 and October 1, 2022.
This “optionality” has been partially negated by the GSEs’ April 2021 pronouncements in which they announced that they, in effect, will adhere to the mandatory effective date of the revised QM rules as originally promulgated by Kraninger in December 2020. In particular, in Fannie Mae Lender Letter 2021-09, Fannie Mae indicated it will no longer acquire loans that are QM Patch loans that do not meet the revised QM rules.
To be eligible for purchase by Fannie Mae, QM Patch loans must:
1) have application dates on or before June 30, 2021, and
2) be purchased as whole loans on or before Aug. 31, 2021, or in MBS pools with an issue date on or before Aug. 1, 2021.
Similarly, in Freddie Mac Bulletin 2021-13, Freddie Mac noted that it will no longer purchase QMs under the QM Patch effective for mortgages with “Application Received Dates” on or after July 1, 2021 and all mortgages with “Settlement Dates” after August 31, 2021.
On May 26, 2021, Fannie Mae and Freddie Mac issued additional guidance reiterating that QM Patch loans that do not meet the revised QM rule must have application dates on or before June 30, 2021. This GSE guidance indicates that single-closing construction-to-permanent loans with application dates before July 1, 2021 that meet the QM Patch (and do not meet the revised QM rules) can be purchased or securitized on or before February 28, 2022.
Under the relevant CFPB regulations governing the QM Patch, a loan must, among other things, be eligible to be “purchased or guaranteed” by Fannie Mae or Freddie Mac. Stated another way, if the loan is not eligible for purchase or guarantee by Fannie Mae or Freddie Mac, the creditor may not avail itself of the QM Patch. Therefore, the GSEs’ April 2021 pronouncements indicating that effective July 1, 2021, QM Patch loans would no longer be eligible for sale to Fannie Mae and Freddie Mac sounds the death knell for the QM Patch notwithstanding the CFPB’s intention to extend it to October 2021.
The Takeaway
1) Commencing March 1, 2021, creditors may underwrite to the revised QM rules.
2) At this juncture, for non-agency loans, the revised QM rules become mandatory on October 1, 2022.
3) For Fannie Mae and Freddie Mac, however, the revised QM rules become mandatory on July 1, 2021, meaning that the QM Patch effectively terminates on July 1, 2021—and that all loans sold to Fannie and Freddie must comply with the revised QM rules, effective July 1, 2021.
4) From March 1, 2021 until October 1, 2022, creditors not selling loans to Fannie and Freddie may continue to underwrite to the legacy QM rules; however, commencing July 1, 2021, legacy QM loans must be underwritten to Appendix Q and NOT to the QM Patch. Stated another way, since the FHFA is terminating the QM Patch, loans underwritten to the QM Patch after July 1 will no longer be eligible for sale to the GSEs, and in effect, the QM Patch disappears after that date, notwithstanding the CFPB’s intent for it to continue until October 1, 2022.
5) Hence, for non-agency loans, from July 1, 2021 until October 1, 2022, legacy QM loans must be underwritten in accordance with Appendix Q.
Source: https://www.jdsupra.com/legalnews/the-qm-patch-is-down-for-the-count-8740196/
