The so-called “GSE Patch” was created in the wake of the financial crisis, as a temporary way to allow American borrowers with higher levels of debt to access credit.
It allows Fannie and Freddie to hold mortgages for people whose debt-to-income ratio exceeds what is necessary to obtain “qualified mortgage” status, which calls for a debt-to-income limit of 43 percent. Therefore, the patch protected the ability of people with higher levels of debt relative to their income to obtain home financing.
The rule is scheduled to expire in Jan. 2021, or when Fannie and Freddie are no longer under conservatorship.
“Loans backed by Fannie Mae and Freddie Mac make up a large portion of the U.S. mortgage market,” Consumer Financial Protection Bureau Director Kathleen Kraninger said in a statement. “The national mortgage market readjusting away from the patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protection.”
According to data from CoreLogic, the patch accounted for about $260 billion worth of home loan originations in 2018 – which is equal to about 16 percent. The real estate industry is therefore warning the patch’s elimination could seriously impact mortgage lending.
Fannie and Freddie hold about one-third of all mortgages – in part because of the patch. The administration is hoping to level the playing field through its elimination.
"Everyone needs to play by the same rules. Fannie and Freddie are not under the same rules," Calabria said.
The administration is taking public comment regarding changes or fixes to the rules, which some see as a welcome development.
“By itself, a borrower’s debt-to-income is a poor indicator of a borrower’s ability to repay and both the numerator and denominator are very hard to define in regulation,” Ed DeMarco, president of the Housing Policy Council (HPC), said in a statement. “We look forward to the public comment process leading to a simplification of the rule without this distortive element that has limited credit availability and consumer choice without enhancing risk assessments.”
The Trump administration has also made clear its intent to eventually release Fannie and Freddie from conservatorship, returning them to the private sector. The government is expected to unveil a plan in the near future detailing how it intends to do so.
FOX Business Edward Lawrence contributed to this report.