In mortgage industry circles, there has been much recent discussion regarding the GSE Patch. Simply put, the patch used to ensure that loans eligible for purchase by Government Sponsored Enterprises (GSE) like Fannie Mae or Freddie Mac were excluded from the QM rule that requires debt-to-income (DTI) ratios to not be greater than 43 percent. However, things may be changing soon. A new qualified mortgage (QM) rule from the Consumer Financial Protection Bureau (CFPB) could replace the patch with a DTI threshold that is calculated in conjunction with the loan’s annual percentage and average prime offer rates.
Many expect current patch terms to expire on June 30, 2021, and after that date any loans must conform to the Preferred Stock Purchase Agreement (PSPA) that was announced in January 2021. The PSPA was made by the Federal Housing Finance Agency (FHFA) and the Department of Treasury and was designed to limit risk. This price-based approach gives lenders respite for loans capped at 150 points above the prime rate. The agreement does not allow GSEs to acquire loans that do not conform to this rule. Instead, all mortgages must be originated under revised QM requirements and must continue to meet Freddie Mac and Fannie Mae’s requirements. Loans originated under the GSE Patch also may not be sold to GSEs if they do not meet these requirements. The Revised Qualified Mortgage Rule and related changes take effect for mortgages with application dates on or after July 1, 2021 and with settlement dates after August 31, 2021.
Freddie Mac recently stated that the organization will not determine if specific mortgages comply with or are exempt from the revised QM rule. Both GSEs said that determination of compliance is the seller’s responsibility. Both Fannie Mae and Freddie Mac have also recently publicly stated that they will obey the limitations detailed in their revised Preferred Stock Purchase Agreements with the Treasury Department. These agreements forbid Fannie Mae and Freddie Mac from buying QM loans under the GSE Patch.
Many wonder if there will be an extension of the GSE Patch, however. The Consumer Financial Protection Bureau seeks to delay the QM rule compliance date until October 1, 2022. Originally, the QM Patch was scheduled to expire in January 2021, but in late 2020 the deadline was extended until July 2021. On March 4, 2021 the CFPB released it proposal that could push the expiration date out by another 15 months.
“Extending the mandatory compliance date of the General QM final rule would allow lenders more time to offer QM loans based on the homeowners’ debt-to-income (DTI) ratio, and not solely based on a pricing cut-off. Extending the compliance date of the General QM final rule would also give lenders more time to use the GSE Patch, which provides QM status to loans that are eligible for sale to Fannie Mae or Freddie Mac,” the Consumer Financial Protection Bureau stated in a recent announcement.
While some are in favor of extending the patch, many in the mortgage industry have opposed delayed implementation of the revised QM rule, stating that it is the first step in completely renegotiating the process. The coming months will determine whether or not the patch will truly expire or be extended or if additional discussions and rulings will take place.
Reliant Bank is a publicly-traded, regulated financial institution with more than $3 billion in assets. We offer a variety of mortgage solution programs with competitive rates and an easy, efficient process for both lending partners and borrowers. Reliant Bank is a profitable bank located in Nashville, Tennessee. We specialize in Prime Jumbo and NonQM loans, purchasing on a Del and Non-Del (flow) basis in all 50 states. Learn more at reliantbank.com
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