The January 2021 GSE patch expiration is an opportunity to update the qualified mortgage (QM) rule to make it work better for future borrowers. Evidence presented in this brief shows that the debt-to-income (DTI) ratio is a weaker predictor of default than other risk measures and that its centrality to the current QM rule distorts the market by misrepresenting true loan risk. We recommend that the Consumer Financial Protection Bureau, accordingly, eliminate the DTI cap from the current QM framework. Restrictions on risky features and products should remain in place. As today, rate spread should continue to determine which loans qualify for safe harbor although the rate spread threshold should be increased from 150 to 200 basis points.
To reuse content from Urban Institute, visit copyright.com, search for the publications, choose from a list of licenses, and complete the transaction.