It’s been delayed, but that’s not enough for the mortgage industry. In a blog post published Thursday, Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit made the case that the Federal Housing Finance Agency‘s (FHFA) loan level price adjustments (LLPA) related to a mortgage borrower’s debt-to-income (DTI) ratio is unworkable and should be scrapped entirely.
The FHFA argues that the changes to the upfront fees on borrowers with a DTI at or above 40% 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,” Broeksmit argued. “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.”
The upfront pricing fee on DTI ratios of 40% or more – part of a larger series of changes to the Enterprises’ pricing grids – was slated to go into effect on May 1, 2023. But the DTI portion of the changes to the pricing grid was pushed back to Aug. 1, 2023, with the regulator saying the DTI charges wouldn’t affect any loans purchased by Fannie Mae or Freddie Mac in 2023.
Mortgage industry trade groups such as the MBA say the new deadline helps, but it doesn’t fix an unworkable problem that represents both a logistical nightmare and also confusion to the customer.
“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,” Broeksmit said. “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.”
Broeksmit said expenses can fluctuate significantly because some items are not in credit reports (child support or alimony being one example) and others are estimated at application but could change at closing, such as HOA dues, hazard insurance and property taxes.
“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,” he said, adding that it would lead to a minimum three-day delay in closing.
Furthermore, the MBA’s top executive said, these logistical problems created by the FHFA would extend well into the post-closing process.
“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.”
Top brass at the FHFA have said they’re listening to the industry’s concerns, but to date have not signaled that they are willing to spike the DTI-related upfront fee.