Blog: MI Industry’s Observations & Recommendations for Replacing CFPB’s QM Patch

The Consumer Financial Protection Bureau (CFPB) just released an Advanced Notice of Proposed Rulemaking on the “Qualified Mortgage Definition under the Truth in Lending Act.” The CFPB is considering whether to revise the Qualified Mortgage (QM) definition in light of the pending expiration of the provision commonly referred to as the GSE Patch (or Temporary GSE QM loan category) in January 2021. The same statutory product restrictions exist for loans under the Patch as for other QM loans, however these loans are not subject to the 43 percent debt-to-income (DTI) limit—a significant exception that has supported a substantial portion of the overall housing market. Considering a robust market has developed under the GSE Patch, any changes could substantially impact consumers’ access to mortgage finance as well as determine the level of risk within the mortgage finance system, which has implications for homeowners, financial institutions, and taxpayers.

As takers of first-loss mortgage credit risk with more than six decades of expertise and experience underwriting and actively managing that risk, USMI members understand the need to balance prudent underwriting with the need to ensure there is a clear and transparent standard that maintains access to affordable and sustainable mortgage finance credit for home-ready borrowers. As different stakeholders contemplate what to do next with the Patch, USMI offers a few observations and recommendations for replacing the QM Patch.


DTI is not the best or most predictive factor in assessing consumers’ ability-to-repay. Pre-financial crisis, one of the most egregious lending practices was making loans to individuals without a reasonable consideration of their financial ability-to-repay (ATR) the loan. As policymakers and regulators aimed to ensure consumers had at least some reasonable ATR their mortgages going forward, the 43 percent DTI cap was established as part of the CFPB’s QM rule. While DTI is not necessarily the most predictive measure, historical data (especially for 2004-2007 cohorts of loans) demonstrates that higher DTIs are correlated to higher defaults (and predictive of a consumer’s ATR).[i] Yet, DTI is only one measure.

USMI and others have identified more predictive borrower characteristics, most notably that reserves in a bank account are more indicative of an individual’s ATR than many other factors. According to a recent report by JPMorgan Chase Institute,[ii] when a borrower has three months of reserves (funds to cover mortgage payments) in the bank, these borrowers were five times less likely to default on their mortgage as those who had insufficient cash in the bank to cover one mortgage payment. According to the JPMorgan Chase Institute report, homeowners who had less than one month’s mortgage payment in savings made up 20 percent of the people in their survey but made up 54 percent of the people in the survey who defaulted on their loans.

While DTI is one factor for assessing ATR, by simply limiting the market to a hard 43 percent limit, many home-ready borrowers will be cut out of the market. In fact, roughly 30 percent of the GSEs’ market today is above the 43 percent DTI limit. CoreLogic estimates that the total loan origination volume for 2018 for loans that were above the 43 percent limit was roughly $260 billion out of a $1.6 trillion market in 2018[iii] (though this number could be higher because some banks have chosen to hold loans in their portfolio that are above the 43 percent DTI limit).

The need for transparency and input on compensating factors. Since the implementation of the QM Rule and the GSE Patch, the market has seen that many good quality loans have been above the 43 percent DTI limit. For loans with higher DTI under the Patch, the market has adapted and relied on compensating factors to adjust for and mitigate the additional risk. These compensating factors are done as part of the GSEs’ automated underwriting systems (AUSs). The current AUSs and the compensating factors used within them are not transparent to stakeholders or the public. However, as mortgage insurers and others analyze GSE loans with higher DTIs, we can begin to back-in to what the compensating factors are and when they come into play for higher DTI GSE loans.


ATR and product restrictions should remain as part of any updates to the QM rule. USMI believes the requirements for assessing a borrower’s ATR that require the lender to underwrite the consumer using credit, income and asset documentation should remain as critical components to any enhancements to the rule. It is also essential that the QM statutory product restrictions remain intact to maintain discipline in the lending community as well as to protect consumers.

A single, transparent underwriting standard for defining QM criteria should be established. USMI recommends a list of transparent mitigating underwriting criteria (compensating factors) for loans with DTIs between 45 and 50 percent for defining QM (in addition to the existing statutorily defined product features and ATR underwriting criteria) be established. While USMI has developed a list of proposed criteria (see below), the list of criteria could ultimately be set by a non-profit membership organization or standard-setting body.

A transparent and easy-to-understand and use set of underwriting criteria can be programmed to allow for manual underwriting or automatic underwriting engines. Further, any private market participant could publish or code these criteria in their investor requirements. For the GSEs, it would remain in the purview of the Federal Housing Finance Agency (FHFA) Director to determine whether the GSEs could guarantee high DTI loans. If not, the loans would simply receive an “Approve/Ineligible” or “Accept/Ineligible” AUS decision. This approach would level the playing field between market participants, allow for continued innovation around documentation, verification, and other underwriting standards, and force the GSEs’ AUSs to become more transparent.

Proposed Set of Compensating Factors

Importantly, USMI believes that there should be one industry standard with complete transparency into the credit decisioning factors used for underwriting mortgage credit risk and that input from industry should be allowed on updates to the underwriting criteria. Further, any changes related to maximum DTIs should be consistent across different lending channels (e.g., FHA and GSEs) to ensure there is not market arbitrage to achieve QM status.

Appendix Q needs to be addressed. All proposals to assess and define an ATR will have challenges or shortcomings. For any proposal that includes DTI, there is still the challenge of addressing the acknowledged limitations of Appendix Q, including to allow lenders to document and verify borrower income and assets utilizing new innovations in the industry. A possible permanent fix to address Appendix Q could be to allow for the GSEs’ guides to be maintained by a regulatory body outside of the GSEs and updated as necessary. Legislation is needed if Appendix Q is to allow for the use of guides or handbooks of the GSEs or other agencies.

APOR could remain the determinant for the Safe Harbor protection but should not be the replacement for DTI requirement and Underwriting Criteria. Further, to provide a more level playing field between the Federal Housing Administration (FHA) and the conventional market, the annual percentage rate (APR) cap of Average Prime Offer Rate (APOR) + 150 bps needs to be increased to account for GSE LLPAs and private mortgage insurance. Setting the cap for QM Safe Harbor protection at 200 bps over APOR + 200 bps will limit the shift of riskier, high-LTV business to FHA, preserve greater private capital participation in the pricing of risk, and promote better taxpayer protection.


[ii] JPMorgan Chase Institute: Trading Equity for Liquidity: Bank Data on the Relationship Between Liquidity and Mortgage Default. June 2019.


Blog: Areas of Alignment for Administrative Reform

September marked the 10th anniversary of the GSEs being placed into conservatorship and there is growing recognition that Congress may not be able to tackle the complex issue of housing reform until 2019 or perhaps even later. But not all aspects of housing reform need to wait for action by Congress. USMI has produced the following white paper to assist the Trump Administration, particularly the Department of Treasury and the independent Federal Housing Finance Agency (FHFA), in identifying the key areas where the Administration should focus its efforts and specific steps the Administration can take to put the housing finance system on a more sustainable path. USMI provides specific recommendations to:

  • Reduce the duopolistic market power of the GSEs
  • Increase transparency
  • Expand private capital and reduce taxpayer risk
  • Promote a strong regulator that establishes uniform standards and uses transparent processes to assess the GSEs’ activities and products

While reforming the GSEs and putting the housing finance system on a more stable, sustainable path is the primary focus of this paper, it is essential that reform is not done in a vacuum. True housing finance reform should also address the Federal Housing Administration (FHA) and dynamics between private and government-insured lending channels to balance taxpayer protection with access to mortgage finance. Actions taken under Administrative reform could further reduce taxpayer risk, level the playing field between the GSEs and private market participants, and provide greater transparency regarding GSE pricing and practices. Further, Administrative reforms could be the catalyst needed to break the legislative logjam and enable Congress to enact comprehensive housing reform legislation.

The full paper can be downloaded here. Below, USMI has outlined 11 key takeaways for policymakers to consider when contemplating the future of housing finance. A PDF of these recommendations can be downloaded here.

Newsletter: October 2016

On October 13, the comment period closed for the Federal Housing Finance Agency (FHFA)’s Single-Family Credit Risk Transfer (CRT) Request for Input (RFI). Below is a roundup of the comment letters submitted by USMI and numerous other housing finance organizations that expressed support behind efforts to reduce government, and therefore taxpayers’, risk exposure by positioning more private capital in a “first loss” position ahead of the government sponsored enterprises (GSEs) through expanded mortgage insurance.

  • USMI notes in its comment letter the distinct advantages of front-end CRT done through expanded use of MI: “Increasing the proportion of front-end CRT in the Enterprises’ CRT strategy will advance four key objectives of a well-functioning housing finance system by ensuring that: (1) a substantial measure of private capital loss protection is available in bad times as well as good; (2) such private capital absorbs and deepens protection against first losses before the government and taxpayers; (3) all sizes and types of financial institutions have equitable access to CRT; and (4) CRT costs are transparent, thereby enhancing borrower access to affordable mortgage credit.” These comments were further highlighted in an article by the Mortgage Professional America magazine. The full comment letter is available here. USMI’s RFI fact sheet can be found here.

Following the submission of USMI’s comment letter, an op-ed by USMI President Lindsey Johnson was published in The Hill that echoes the benefits provided to the GSEs and US taxpayers by front-end CRT through expanded use of MI.

  • A number of other stakeholders and organizations also weighed in, supporting efforts to expand the use of MI:
    • Urban Institute wrote: “The GSEs could share additional credit risk through this channel by having some MIs cover a deeper level of first loss, down to, say, an effective LTV of 50%. So-called deep cover MI has several attractive features. First, it extends a structure already in wide use, making it easy for lenders of all sizes to adopt. Second, in contract to the front-end structures used to date, it is equally available to and can be equally priced for lenders of all sizes. Third, it is completely transparent… Since mortgage insurance is the only product MIs offer, they will provide capital in good times and bad.”
    • National Association of Home Builders wrote: “Deep coverage MI would allow mortgage insurance companies to reduce the Enterprises’ exposure to credit losses to as low as 50 percent of the mortgage loan amount. The Enterprises would reduce their guarantee fees on the mortgage loans commensurate with the cost of the risk they transfer to the mortgage insurers. The reduced guarantee fee charged by the Enterprises in exchange for incurring less credit risk can be passed on to consumers, reducing the cost of the mortgage loans and increasing the availability of credit.”
    • Mortgage Bankers Association wrote: “Up-front risk-sharing structures with committed mortgage market participants such as lenders, mortgage Real Estate Investment Trusts (REITs) and mortgage insurers can distribute mortgage credit risk prior to the loan(s) being acquired by the GSEs, while offering potential borrower benefits… Well-conceived up-front risk sharing pilot programs, such as expanded lender recourse offerings, deeper mortgage insurance or other capital markets structures that are executed prior to GSE acquisition, can help the GSEs better determine which transaction structures are best able to expand the sources of private capital and withstand both the peaks and valleys in the credit cycle.” These comments were further highlighted in an article by Scotsman Guide.
    • Community Mortgage Lenders of America wrote: “There is no substitute for the depth of experience, the broad web of customer relationships and level of service that the MI industry provides to lenders, nor to the key role played by mortgage insurers in facilitating low down payment lending for borrowers whose home finance needs are served with a low down payment mortgage.”
    • Credit Union National Association wrote: “… private mortgage insurance needs to be maintained as an option as it can be utilized as an effective risk transfer strategy.”
    • Housing Policy Council wrote: “We specifically recommend that FHFA and the Enterprise test deeper mortgage insurance through a pilot program. Of the various structures discussed in the RFI, only deeper mortgage insurance has yet to be tested in the marketplace.”

In addition, last week the Congressional Budget Office (CBO) released a report entitled “The Effects of Increasing Fannie Mae’s and Freddie Mac’s Capital.” The October 20th report came at the request of Senate Banking Committee Chairman Richard Shelby (R-AL) and analyzes a policy that would allow the GSEs to increase their capital by reducing payments to Treasury, as well as discusses the effects it would have on the federal budget and the U.S. mortgage market.

Statement: Polling Finds Majority Supports Using Private Capital to Reliably Reduce GSE Taxpayer Risks

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(February 16, 2016) Last week saw more activity demonstrating the value of private Mortgage Insurance as a reliable way to enhance access to mortgage credit for consumers and protect taxpayers against housing losses, particularly through greater front end risk sharing by the GSEs:

  • USMI released a new fact sheet showing how MIs are strong counterparties that reliably transfer mortgage credit risk
  • DS News reported on new polling from USMI showing strong national support for reducing GSE and taxpayer risk through increased reliance on private capital
  • USMI Chairman and Genworth MI CEO Rohit Gupta appeared at the Urban Institute /Core Logic Forum on risk sharing, “Credit Risk Transfer: Making a Successful Program Even Better.”
    • Gupta talked about the enhanced reliability and higher capital standards for MI, and how deeper MI coverage on GSE loans would almost double the amount of loss protection for the GSEs and taxpayers
    • Urban’s Laurie Goodman talked about an advantage of front end risk sharing with MI to pass savings through to consumers

U.S. Mortgage Insurers (USMI) is dedicated to a housing finance system backed by private capital that enables access to housing finance for borrowers while protecting taxpayers. Mortgage insurance offers an effective way to make mortgage credit available to more people. USMI is ready to help build the future of homeownership.  Learn more at

Factsheet: Backgrounder on the Value of Responsibly Underwritten 97 LTV Loans

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Bringing Back the 3% Down Payment Loan: Good for First-Time Homebuyers and Taxpayers

On October 20, Federal Housing Finance Administration (FHFA) Director Watt announced that FHFA and the GSEs were working on guidelines to expand access to 3% low down payment mortgages.  Private mortgage insurance (MI) has been readily available to creditworthy borrowers in this market segment for many years, and those responsibly underwritten low down payment loans have a long track record of good performance – comparable in fact to 5% down payment loans.  At a time when the share of first-time homebuyers is declining, restoring access to these loans is an important option that would help creditworthy borrowers, especially first-time homebuyers, achieve affordable homeownership in a sensible and responsible manner.  Wider availability of prudently underwritten 97% LTV loans would present many benefits for both consumers and taxpayers.

  • Reduce Taxpayer Exposure with Private Capital: The return of a 3% down payment mortgage purchased by the GSEs for creditworthy borrowers would not present undue to risk to taxpayers because the GSEs require the use of MI, providing substantial first-loss protection for taxpayers in the form of private capital.  Through the use of MI, a prudently underwritten 3% down payment loan with MI actually reduces taxpayer exposure below a comparable 20% down payment loan without MI.

Reducing Taxpayer Exposure infographic

In addition, the absence of low down payment options backed by private capital has only shifted greater risk to taxpayers.  Offering a 3% down payment loan with MI purchased by the GSEs would reduce taxpayer risk by giving borrowers an alternative to FHA and other government programs, where taxpayers are responsible for 100% of losses.  Furthermore, because FHA allows sellers to contribute up to 6% of the sales price, FHA loans may now already be effectively in excess of 97% LTV.

  • Strong History of Performance: MI has been readily available to creditworthy borrowers in this market segment for many years, and those responsibly underwritten low down payment loans have a long track record of good performance – comparable in fact to 5% down payment loans.  According to the Urban Institute, data on default rates for loans with a down payment between 3-5 percent was comparable to that for loans with a slightly larger down payment of between 5-10 percent.
  • Provide Responsible Loans With High Standards: The regulatory and underwriting landscape has changed dramatically since the crisis.  Fully documented low down payment loans were not the cause of the mortgage crisis, and Dodd-Frank requirements have removed the products that were.  The return of 3% low down payment loans would have to be consistent with new Qualified Mortgage standards’ emphasis on responsible lending, and be fully documented.
  • Increase Affordable Options for Creditworthy Borrowers: Coming up with the required down payment can be one of the biggest hurdles to homeownership.  For example, it could take about 20 years for the average firefighter or schoolteacher to save a typical 20% down payment.  Right now, many low down payment borrowers are left with no other option but government lending programs such as FHA.  Borrowers without a sufficient down payment are required to have government-sponsored mortgage insurance, which cannot be cancelled and thus adds significant additional costs to the borrower over the life of the loan.  Loans with private MI offer borrowers an additional option, one that is not only highly competitive in terms of pricing, but also cancelable once the LTV has reached approximately 80%, thus providing substantial savings to borrowers.  These borrowers would also benefit greatly from an opportunity to purchase while 30-year fixed rates are near historic lows.

Chart of a Typical Initial Monthly Payment Comparison: FHA vs. MI

Providing qualified buyers greater access to 3% low down payment loans is yet another example of how MI can help make mortgage credit available to more qualified borrowers, working with lenders of all sizes, while protecting taxpayers.


U.S. Mortgage Insurers (USMI) is dedicated to a housing finance system backed by private capital that enables access to housing finance for borrowers while protecting taxpayers. Mortgage insurance offers an effective way to make mortgage credit available to more people. USMI is ready to help build the future of homeownership.  Learn more at

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