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May 31, 2019  

Redwood Pushes for Quick End to QM Patch

Redwood Trust is urging regulators not to extend a measure that enables Fannie Mae and Freddie Mac to buy and securitize mortgages that fall outside the Consumer Financial Protection Bureau’s “qualified-mortgage” standards.

The so-called QM patch is set to expire in January 2021, but the CFPB has the power to delay that step. At that point, the Federal Housing Finance Agency, as conservator for Fannie and Freddie, would have the discretion to terminate the provision at any time.

Redwood this month circulated a report titled “Perspectives on Private Capital and the ‘QM Patch’ ” in which it argues against an extension. Redwood chief executive Christopher Abate also traveled to Washington last week to argue his case to FHFA head Mark Calabria and CFPB personnel responsible for qualified-mortgage policy.

The patch is a Dodd-Frank Act provision enacted in 2014. Without it, Fannie and Freddie only would be able to buy and securitize qualified loans. Redwood joins a growing group of market participants, including Eric Kaplan of the Milken Institute, who see the repeal of the measure as a key step in stimulating private-label lending while setting the stage for the unwinding of the agencies.

Redwood wrote in its report that 25-35% of single-family mortgages purchased by Fannie and Freddie, or around $185 million annually, would be considered private-label non-qualified loans if not for the QM patch. “The patch is the logical first step,” Abate said.

The measure could expire earlier if the agencies are brought out of conservatorship. However, the Trump Administration’s plans to take that step without legislative approval appear to have hit a snag. That’s in part because of the heavy workload that Trump’s trade war with China has placed on U.S. Treasury Secretary Steven Mnuchin. What’s more, Craig Phillips will leave his post as Mnuchin’s housing-policy advisor in June.

Phillips has been the administration’s point man in pulling the agencies out of conservatorship. “My sense is that Phillips was frustrated with the pace of reform,” one source said.

As for the FHFA, Abate said Calabria made it clear during their meeting that he wants to give Congress a window to produce a legislative exit plan for Fannie and Freddie — after which he would likely take administrative action. The first steps in that process could be to eliminate the QM patch or raise guarantee fees, Abate said.

“[Calabria is] going to give Congress the opportunity to do something, and has five years in office so he knows he’s in it for the long run,” Abate said. “I think that’s a savvy move. Rome wasn’t built in a day. That’s why many are so focused now on the QM patch. He can address that ahead of its expiration.”