The Macroprudential Implications of the Qualified Mortgage Debate

In January 2021, the Consumer Financial Protection Bureau will face a decision: to renew its special definition for Qualified Mortgages (QMs) made by Fannie Mae and Freddie Mac, abolish that definition, or adopt some other approach to Qualified Mortgages. Concerns about access to credit have propelled the issue whether any definition of a QM should impose a debt-to-income (DTI) cap to the forefront of the debate. Because market discipline will not halt an inflating housing bubble occasioned by deteriorating DTI levels, we argue that the CFPB needs to mandate a general DTI cap as part of the definition of a QM. However, we would temper that DTI cap in two important respects. First, the Bureau should examine whether the 43 percent DTI limit could be modestly raised without significantly raising housing prices or default risk, that is, without increasing systemic risk. Second, the CFPB should further relax the DTI cap for loans that meet the affordable housing goals established by the Federal Housing Finance Agency. Providing targeted DTI relief to affordable housing goal loans would expand credit availability to those who really need it without creating inflationary pressures culminating in a future real estate bubble.

Patricia McCoy, Susan Wachter

Journal of Law and Contemporary Problems

September 2019

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