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Didier Malagies • June 24, 2020
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CFPB to Adopt Price-Based Approach for Qualified Mortgage Standards
Source: Inman
Written by: Marian McPherson
The Consumer Financial Protection Bureau on Monday proposed the elimination of debt-to-income limits for qualified mortgages processed through Fannie Mae and Freddie Mac, as the government-sponsored enterprises patch nears expiration in January 2021.
Instead of using DTI limits to predict a borrower’s creditworthiness, the CFPB is suggesting a price-based approach that considers annual and prime offer rates to bolster mortgage accessibility.
“The GSE Patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” CFPB Director Kathleen L. Kraninger said in a prepared statement. “The Bureau is proposing to replace the Patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them.”
“The Bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE Patch,” Kraninger added.
To approve a qualified residential mortgage loan, lenders must use the Truth in Lending Act’s ability-to-repay requirements to calculate a borrower’s creditworthiness. Alongside the elimination of interest-only periods, negative amortization, balloon payments, and extended loan terms (30-plus years), TILA requires borrowers to have a debt-to-income ratio of less than 43 percent.
Under this rule, certain Fannie Mae and Freddie Mac guaranteed loans have been given temporary qualified mortgage status, even if the DTI surpasses 43 percent. According to the CFPB, temporary GSE QM loans “represent a large and persistent share of mortgage originations” and put nearly 1 million borrowers at risk when the patch expires in January.
“As noted above, the GSE Patch is scheduled to expire soon, and absent regulatory action the Bureau estimates that approximately 957,000 mortgage loans would be affected by the expiration of the GSE Patch,” CFBP’s announcement read. “The Bureau estimates that, after the Patch expires, many of these loans would either not be made or would be made but at a higher price.”
To maintain mortgage availability and affordability, the CFPB is proposing two amendments to Regulation Z, which requires lenders to provide written disclosures explaining interest rates, finance charges, and additional loan terms. It also requires lenders to answer borrowers’ billing questions and prohibits unfair lending practices.
The first amendment would eliminate DTI limits in favor of a price-based approval, which the CFPB said is a “more holistic and flexible” method of determining a borrower’s creditworthiness.
“The Bureau is proposing a price-based approach because it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone,” the announcement read.
With this method, lenders will still be encouraged to “take into account a consumer’s income, debt, and DTI ratio or residual income and verify the consumer’s income and debts.”
The second amendment to Regulation Z addresses the GSE Patch expiration date. Instead of allowing the Patch to expire January 2021, the CFPB is asking for it to be extended until the first Regulation Z amendment is approved.
“The Bureau is proposing to take this action to ensure that responsible, affordable credit remains available to consumers who may be affected if the GSE Patch expires before the amendments take effect as defined in the first NPRM,” the amendment read.
“Under the CFPB’s proposed rule change, an easy-to-understand number would be replaced by lenders’ judgment. The risk is that, over time, borrowers and lenders would make increasingly reckless decisions under this proposed rule. After all, they have a track record of irresponsibility from about 2005 to 2008.
The National Association of Realtors supports CFPB’s proposals, with NAR President Vince Malta telling HousingWire the amendments would help homebuyers achieve their homeownership goals amid a coronavirus-induced market shift.
“America’s Realtors applaud the CFPB’s action to provide a temporary QM patch extension, and commend the bureau and Director Kraninger for acting on behalf of our nation’s consumers and homebuyers at a time when market stability is so critical,” Malta said. “Perhaps most importantly, we appreciate the Bureau’s decision to eliminate a hard DTI standard, and we look forward to more closely examining the proposed replacements and their impact on homebuyers over the coming months.”
However, some experts are concerned lenders will exploit the new more flexible requirements to approve high-rate loans for desperate homebuyers.
“Specifically, the proposal would get rid of a rule that legally protects loans with a debt-to-income ratio of 43 percent or less,” NerdWallet Home and Mortgage Expert Holden Lewis said in an emailed statement to Inman. “It would be replaced by a rule that says a lender is legally protected if the mortgage’s APR is less than two percentage points higher than the average APR that week for a prime mortgage.”
“The CFPB argues that this wouldn’t make a big change in mortgage risk or availability,” Holden added. “It would have to find a way to prevent lenders from gaming the system with high-rate loans that just barely fit within the guidelines.”
Check out our other helpful videos to learn more about credit and residential mortgages.
After years of identifying the housing market as unhealthy — culminating in a savagely unhealthy housing market in early 2022 — I can confidently assert that the housing market in 2024 and 2025 is on better footing. This transformation sets an extremely positive foundation for what’s to come. Some recent headlines about housing suggest that demand is crashing. However, that’s not the case, as the data below will show. Today on CNBC , I discussed this very point: what is happening now is not only in line with my price forecasts for 2024 and 2025, but it’s why I am so happy to see inventory grow and price growth data cool down. What we saw in late 2020, all of 2021 and early 2022 was not sustainable and we needed higher mortgage rates to cool things down — hence why I was team higher rates early in 2021. The last two years have ushered in a healthier market for the future of existing home sales. Existing home sales Before the existing home sales report was released Thursday, I confidently predicted a month-to-month decline, while estimating the existing home sales print to be just a tad above 4 million. That’s precisely what occurred — no surprises there, as every month in 2025 has consistently exceeded 4 million. However, it’s important to note that our weekly pending home sales data has only recently begun to show growth compared to last year. We have an advantage over the data from the National Association of Realtors since our weekly pending home sales data is updated weekly, making their report somewhat outdated. The notable surprise for me in 2025 is the year-over-year growth we observe in the data, despite elevated mortgage rates. If mortgage rates were ranging between 6%-6.64%, I wouldn’t have been surprised at all because we are working from the lowest bar in sales ever. Purchase application data If someone had said the purchase application data would show positive trends both year to date and year over year by late April, even with mortgage rates not falling significantly below 6.64%, I would have found that hard to believe. Yet, here we are witnessing consistent year-over-year growth . Even with the recent rate spike, which has clearly cooled demand week to week, we are still positive. If mortgage rates can just trend down toward 6% with duration, sales are growing. Housing inventory and price growth While my forecast for national price growth in 2024 at 2.33% was too low and in 2025 at 1.77% may be too low again, it’s encouraging to see a slowdown in price growth, which I believe is a positive sign for the future. The increase in inventory is also promising and supports long-term stability in the housing market. We can anticipate that millions of people will continue to buy homes each year, and projections suggest that we’re on track for another nearly 5 million total home sales in 2025. As wages rise and households are formed, such as through marriage and bringing in dual incomes, this influx of inventory returning to normal levels provides an optimistic outlook. This trend in inventory data is truly heartening. Conclusion With all the data lines I added above, you can see why I have a renewed optimism about the housing market. If price growth significantly outpaced inflation and wages, and inventory wasn’t increasing, I’d be discussing a much different and more concerning state of affairs. Thankfully, that’s not the case. Historically, we’ve observed that when home sales dip due to higher rates, they may remain subdued for a while but ultimately rise again. This is common during recessions, as I discussed in this recent HousingWire Daily podcast . As you can see in the existing home sales data below, we had an epic crash in sales in 2022 but found a base to work from around 4 million. This trend has shaped the landscape of housing economics since post-WWII, reminding us that resilience and recovery are always within reach. 
1. Cash-Out Refinance How it works: You replace your current mortgage with a new, larger loan and take the difference out in cash. Pros: Often lower interest rates compared to other methods. Longer repayment terms. Cons: Closing costs (typically 2–5% of the loan amount). Resets your loan term (could be 15, 20, or 30 years). Tougher underwriting for investment properties vs primary residences. 2. Home Equity Line of Credit (HELOC) How it works: You get a revolving line of credit based on your property’s equity. Pros: Flexibility — borrow what you need, when you need it. Pay interest only on what you draw. Cons: HELOCs for investment properties are harder to get and may have higher rates. Variable interest rates (payments can increase). 3. Home Equity Loan ("Second Mortgage") How it works: A lump-sum loan secured by your property's equity, separate from your existing mortgage. Pros: Fixed interest rates and predictable payments. Cons: Higher rates than primary mortgages. Separate loan payment on top of your existing mortgage. 4. Sell the Property How it works: You sell the investment property and realize your equity as cash. Pros: Immediate full access to equity. No debt obligation. Cons: Capital gains taxes may apply. You lose future appreciation and cash flow. 5. Portfolio Loan How it works: A loan based on a group (portfolio) of your properties' combined value and cash flow. Pros: Useful if you have multiple properties. Lenders may be more flexible on qualifications. Cons: Complex underwriting. Higher costs. 6. Private or Hard Money Loan How it works: Short-term, high-interest loan based on property value, not personal credit. Pros: Fast funding (days instead of weeks). Less strict underwriting. Cons: Very high interest rates (often 8%–15%+). Short loan terms (often 6–24 months). 7. Seller Financing (if you're buying another property) How it works: If you own a property free and clear, you could "sell" it and carry financing, creating cash flow and upfront cash through a down payment. Pros: Passive income from note payments. Cons: Risk if the buyer defaults. Key Factors to Think About: How quickly do you need the cash? How much do you want to borrow? How long do you want to be repaying it? How the new debt impacts your overall portfolio. tune in and learn https://www.ddamortgage.com/blog didier malagies nmls#212566 dda mortgage nmls#324329
When you're buying a home, it's not just about affording the purchase price or down payment. You’ve got closing costs, moving expenses, and all the “surprise” things that come up after you move in — like needing a new appliance, fixing a plumbing issue, or just furnishing the place. Keeping some cash reserves is smart. A good rule of thumb is to have at least 3-6 months of living expenses saved after the purchase, just in case life throws a curveball. Are you thinking about buying soon or just planning ahead? tune in and learn https://www.ddamortgage.com/blog didier malagies nmls#212566 dda mortgage nmls#324329
