The Macroprudential Implications of the Qualified Mortgage Debate

Abstract

In January 2021, the Consumer Financial Protection Bureau (CFPB or Bureau) will face a decision: renew its special definition for Qualified Mortgages (QMs) made by Fannie Mae and Freddie Mac, abolish that definition, or adopt some other approach to QMs. This seemingly arcane issue, which concerns the so-called Government-Sponsored Enterprise (GSE) Patch,is the subject of fierce debate and a recent Advance Notice of Proposed Rulemaking (ANPR) by the CFPB.

While ostensibly inconsequential to those unfamiliar with the topic, this decision may open the floodgates again to a private-label mortgage system without the necessary regulatory controls to prevent ruinous competition. Today’s mortgage market and existing law preclude many toxic mortgage products. But reckless firms offering underpriced credit to weak borrowers can still fuel a future bubble and bust. Moreover, today’s market is more vulnerable to such shortsighted lending behavior because of the rise of nonbanks with limited capital.