The Macroprudential Implications of the Qualified Mortgage Debate

83 Journal of Law and Contemporary Problems 21 (2020)

27 Pages Posted: 23 Sep 2019 Last revised: 17 Mar 2020

See all articles by Patricia A. McCoy

Patricia A. McCoy

Boston College Law School

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: March 14, 2020

Abstract

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.

Keywords: housing bubble, systemic risk, qualified mortgage, access to credit

JEL Classification: E31, E32, G01, G18, G21, G23, G28, K22, K23

Suggested Citation

McCoy, Patricia Ann and Wachter, Susan M., The Macroprudential Implications of the Qualified Mortgage Debate (March 14, 2020). 83 Journal of Law and Contemporary Problems 21 (2020). Available at SSRN: https://ssrn.com/abstract=3453511

Patricia Ann McCoy (Contact Author)

Boston College Law School ( email )

885 Centre Street
Newton, MA 02459-1163
United States

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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