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Charting a Course for High Debt-to-Income Borrowers

According to recent data, the GSE patch, which allows higher debt-to-income (DTI) ratio mortgages to qualify for the protections provided under the qualified mortgage (QM) rule, disproportionately benefits minority and lower-income borrowers. The Urban Institute and data from Recursion Co., a financial analytics firm, states that letting the patch expire in 2021 with no change will further disadvantage these already underserved groups.

The patch is currently set to expire in 2021. In a report, Laurie Goodman, VP, Housing Finance Policy at the Urban Institute notes that approximately 19 percent of GSE loans in the 2014–2018 period, or 3.3 million loans, were made possible by the patch. According to Goodman, high DTI GSE borrowers are disproportionately minority borrowers with incomes that are, on average, less than those of borrowers with lower DTIs.

“This new evidence firmly establishes that the GSE patch disproportionately benefits minority borrowers and borrowers whose incomes are at the lower end for new homeowners,” Goodman said. “This finding suggests that if the patch is not extended, a replacement should be found that supports credit availability for minority borrowers.”

Moving forward, the patch may be impacted by the end of GSE conservatorship, recently called for by President Donald J. Trump. In a memorandum tasking the Treasury Department and Department of Housing and Urban Development (HUD) with preparing a reform plan for Fannie Mae and Freddie Mac. In the memorandum, the President specifically called for a "comprehensive" plan for removing Fannie and Freddie from the government conservatorship under which they have been operating since September 2008, during the housing crisis.

The memo states that "in the decade since the financial crisis, there has been no comprehensive reform of the housing finance system despite the need for it, leaving taxpayers exposed to future bailouts." The memo went on to claim that "the Department of Housing and Urban Development’s (HUD) housing programs are exposed to high levels of risk and rely on outdated business processes and systems."

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.
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