The Truth About the CFPB’s Mortgage Rules

Policymakers need to stop pretending that ever-expanding mortgage leverage is the solution

Letter to The WSJ. 

"In their March 13 op-ed “Trump Harms Consumers by Weakening the CFPB,” Chris Dodd and Barney Frank, authors of the act establishing the Consumer Financial Protection Bureau, note that “the law prohibits the granting of mortgages that burden home buyers beyond their capacity to repay.”

The truth is that the CFPB, through its Qualified Mortgage rule and its ever-expanding debt-to-income (DTI) ratio, has enabled the granting of mortgages that exceed home buyers ability to pay, which has helped fuel rising housing costs. When implemented in 2014, it included a hard 43% pre-tax DTI limit. Then came the loopholes. First through the “QM Patch,” allowing Fannie Mae and Freddie Mac to securitize loans with DTIs up to 45% and, later on, to 50%. Then, it granted the Federal Housing Administration, Department of Veterans Affairs and U.S. Department of Agriculture’s Rural Housing Services the authority to set their own QM rules. The FHA set its maximum DTI at 57%.

It doubled down in 2020, when it rewrote the QM definition, scrapping the DTI limit entirely and replacing it with a rate-based test. We warned at the time that this was a deeply flawed measure of mortgage risk, which would do nothing to curb runaway home prices.

As Federal Reserve Board chairman Marriner Eccles pointed out in 1947: “If [expanded credit] calls forth more production it will be desirable. If it only permits one borrower to bid against another would-be buyer for scarce goods and thus adds to upward pressure on prices, it is dangerous.”

In 2013 only 24% of Fannie, Freddie and FHA mortgages had DTIs above 43%. Today that has nearly doubled. Home prices have skyrocketed 130% since 2013, while wages have risen less than 40%. Policymakers need to stop pretending that ever-expanding mortgage leverage is the solution.

Ed Pinto and Tobias Peter

American Enterprise Institute

Washington"