CFPB’s new seasoning rule is already showing promise
The Urban Institute (UI) reviewed a final mortgage rule issued by the Consumer Financial Protection Bureau (CFPB) at the end of 2020 that would provide a three-year path to the Safe Harbor for loans that constitute a rebuttable presumption or mortgage not qualified at creation. The study, conducted by UI analysts Karan Kaul, Laurie Goodman and Jun Zhu, found that loan performance in the first three years of the mortgage term is a better predictor of loan performance. later than the rate differential.
The rule requires that presumption rebuttable mortgages and conventional unqualified first mortgages can be considered a safe harbor 36 months after inception if they are kept on the principal’s balance sheet. They can also be sold once and then held in full on the buyer’s balance sheet for the entire three-year period. These loans cannot be 30 days past due more than twice nor be 60 days late in the three-year seasoning period.
On the same day that this rule was released, December 10, 2020, the CFPB finalized a major overhaul of its 2014 Qualified Mortgage (QM) rule, removing the maximum debt-to-income ratio (DTI) limit of 43. % of the definition of QM. This made the GSE (government sponsored company) patch redundant. The agency also instituted a new rate spread cap of 225 basis points above the average prime offer rate (APOR) as the outer limit of the QM box.
Under the new quality management rule, effective no later than July 1, 2021, loans that meet mandatory quality management requirements (i.e., Product restrictions, point and fee limits and maximum terms of 30 years) and whose annual percentage rates are less than 150 basis points above the PADR will be considered a safe haven regardless of the debt-to-income ratio. Loans with credit spreads between 150 and 225 basis points against the PADR will be a rebuttable presumption, and those with spreads of 225 basis points or more will be unqualified mortgages, regardless of the debt-to-income ratio.
The seasoning rule provides a conditional route for the rebuttable presumption and unqualified mortgages to become safe haven loans. The seasoning rule only applies to fixed rate first mortgages that meet product functionality requirements and point and charge limits of the general definition of the QM loan. In addition, loans defined as high cost mortgages, or HOEPA (Home Ownership and Equity Protection Act) mortgages, are never eligible.
The authors sought answers to two questions:
- Is loan performance in the first three years generally predictive of long-term performance?
- How do the probabilities of default for loans that are originally secure compare to default rates for loans that are not originally secure? but would he pass the new seasoning test to become a refuge after three years?
They placed the 30-year GSE fixed rate mortgage loans, portfolio and private label (PLS) from 1999 to 2016 in compartments based on the three categories of credit spread at origination and on the performance of loans for three years after origination (i.e. payment history, one or two 30-day delinquencies, one 60-day delinquency.
The loans in each tranche were then measured by the likelihood of being in arrears for 90 days or more in years four, five and six. The red cells indicate the rates that occurred among loans that were rebuttable presumption or unqualified mortgages at inception, but would have passed the aging test to become safe haven after three years. (“N / A” indicates tranches with less than 500 loans.) The last column shows the number of loans in each tranche.
Of the 2013-2016 portfolios that were not secure at inception, but maintained a three-year net earnings history, those with credit spreads of 150 to 225 basis points subsequently had a 3.6% delinquency rate at 90 days. For those with a credit spread greater than 225, 5.0% were overdue for 90 days or more in the four, five, or six years. The seasoning rule would consider these two loan installments to be a safe haven rule after three years. Note that these percentages are lower than the corresponding 90-day default rates for safe haven portfolio loans – 5.3% for loans that have been 30 days past due twice and 12.2% for loans that have been in arrears. suffering for 60 days once in the first three years. The comparison with safe-haven loans with a The 60-day delay in the first three years is particularly striking. In other words, the rebuttable presumption and ineligible mortgages with a clean pay history in the first three years performed much better in years four, five and six than loans that were secure at the time of origination. but who have been overdue for 60 days once in the first three years.
The same pattern was found to be true for the 2013-16 PLS origins. The rebuttable presumption and unqualified mortgages with a three-year net pay history were in arrears for 90 days or more in the four, five or six years at a rate of 2.5%, down from 3.8 % of safe haven loans with two 30 day delinquencies or 12.7% of safe haven loans with a 60 day non-current condition. It held for the origins GSE 2013-16 and more broadly for the historical production on the three channels as well. The authors claim that this indicates that three years of loan performance is a better predictor of subsequent performance than the origination spread (which is determined by origination characteristics).
Too, safe-haven loans accounted for about 99% of all loans from 2013 to 2016 on all three channels, the rebuttable presumption constituting most of the rest. So if the CFPB seasoning rule were in effect from 2013 to 2016, it would only have applied to around 1 percent of origins.
The authors say that a three-year seasoning trajectory to Safe Harbor could increase lending in this segment. Higher rate conventional loans, especially in the non-GSE space, are a critical source of credit for racial and ethnic minorities, first-time buyers, households with limited means, or others who are not eligible. government-funded loans, including self-employed and small-scale workers with non-traditional sources of income. This is not a panacea, as banks and other portfolio investors tend to hold relatively few of these loans, but at the margin the path will widen the credit box.
While acknowledging that the above borrowers are more likely to be overcharged, Kaul, Goodman, and Zhu say they can’t ignore the fact that sustainable homeownership is the key. only a viable path to wealth creation for these households. The availability of a seasoning route to a safe port will likely increase the loan options available to them.