On March 15th, the Federal Housing Finance Agency (FHFA) announced that it would postpone the implementation of loan level pricing adjustment (LLPA) fees that would be based on a borrowers’ debt-to-income (DTI) ratio in Fannie Mae and Freddie Mac’s (the GSEs) single-family pricing grids until deliveries on or after August 1, 2023. The delay creates an opening for FHFA to get the policy right. The DTI-based LLPA is unworkable and should be replaced.
FHFA says the changes to the upfront fees would make the GSEs more “safe and sound” and help them continue to fulfill their mission to advance equitable and sustainable access to homeownership. Just about everyone agrees that these are worthy goals, but instituting DTI-based LLPAs is an ill-advised means to achieve them. There is a reason the revised general Qualified Mortgage (QM) definition excludes the DTI ratio: Studies demonstrate that as a stand-alone measure, DTI is not a strong indicator of a borrower’s ability to repay.
To start, tying an LLPA to a DTI ratio would pose a multitude of operational issues, and compliance challenges, and also create a frustrating and confusing borrower experience. In addition, a DTI-based LLPA will create costly post-origination quality control disputes between lenders and the GSEs. A borrower’s income and expenses can change several times throughout the loan application and underwriting process. This is especially true in today’s labor market, which is shaped by the growth in self-employment, part-time employment, and “gig economy” employment. Expenses can also fluctuate significantly because some items are not in credit reports (e.g., child support or alimony) and others are estimated at application but change at closing (e.g., hazard insurance, HOA dues, property taxes). The resulting fluctuations in DTI could result in multiple changes to a borrower’s loan pricing in the period between application and closing.
Imagine being a borrower who is quoted one rate when applying for a loan, then getting near closing and hearing from your lender that, due to a slightly slower month at work or a higher homeowner’s insurance premium, the cost of your loan will have to go up because you exceeded FHFA’s DTI threshold. In addition, you learn that your lender must postpone your closing for a couple of days because that price change triggered a redisclosure and mandatory three-day waiting period under the CFPB’s Know Before You Owe/TRID rule.
Or consider the borrower who is offered a 5.875% rate with half a point in fees who would rather pay a slightly higher rate to avoid paying points at closing. When the loan officer recalculates the DTI at a 6% rate with no points, the DTI exceeds 40%, triggering the 0.375% additional fee – the borrower will not understand why paying 0.125% more in rate reduces the points by only 0.125%.
The machinations caused by the DTI fee will be perceived by the consumer as the lender constantly moving the goalposts, jeopardizing the trust between borrowers and lenders. For lenders, verifying multiple changes in the DTI during the underwriting stage of the loan process would introduce a host of operational and compliance issues, requiring extensive training and updates to processes and technology systems. Lenders would have to evaluate whether every change during the origination process constitutes a change of circumstances that would trigger redisclosures under TRID.
The unworkable complexities would carry into the post-closing process as well. Repurchase requests from the GSEs are already rising sharply — the majority of these disputes are related to income calculations because the GSEs’ rules for counting certain sources of income toward “qualifying” income can be confusing and difficult to interpret with consistency. The new DTI fee would likely mean lenders would see many more “defects” for minor calculation “errors” in the DTI ratio.
MBA members have a long history of adjusting to regulatory changes. Our more than 2,100 member companies, representing the full range of lenders, loan servicers, and other stakeholders, share FHFA’s goal of a sound mortgage finance system. MBA is certain, however, that the LLPA based on DTI would not advance the GSEs’ mission but instead create complications and problems for borrowers and lenders alike. This is not a problem that will be solved with more time to implement; it will be just as unworkable a year from now as it is today. We have made our position clear to FHFA and the GSEs and will continue to work cooperatively to find an alternative solution. Time is of the essence, as the proposed August 1st implementation date means loans being locked in starting in mid-May (or even earlier for new construction loans) will be affected.