CFPB Could Curb High-Debt Mortgages

WASHINGTON—The Trump administration plans to eliminate a regulatory loophole that put the government on the hook for an additional $260 billion of mortgages last year, a move that could limit the availability of credit for home loans.

The Consumer Financial Protection Bureau took a preliminary step Thursday toward revamping a postcrisis regulation that has transformed the mortgage market by allowing more deeply indebted borrowers to obtain home financing.

At issue is an obscure half-decade-old provision that makes mortgages possible for buyers with high debt relative to their incomes. That temporary provision expires at the beginning of 2021, and Thursday’s move could potentially replace the provision with a tougher version of the regulation.

The proposal is expected to generate pushback from real estate and mortgage industry groups that favor maintaining a relaxed set of rules that ensure loans are broadly available. Others say that these borrowers are riskier.

Those contrasting views will shape efforts by the Trump administration to overhaul the housing-finance system in a way that will likely reduce the government’s role in housing. A central part of that effort revolves around returning

Fannie Mae


Freddie Mac

to private ownership after a decade under Washington control. The Treasury Department is expected to release a blueprint for broadly reshaping housing finance in the coming weeks that will outline steps to privatize Fannie and Freddie, which guarantee roughly half the mortgage market.

Thursday’s narrower move could have an outsize effect on housing by curtailing the types of loans that are eligible for purchase by Fannie and Freddie. That would likely make it harder for indebted borrowers to find lenders willing to give them a mortgage.

The bureau could also take action to preserve the availability of these mortgages. If the CFPB were to, for example, codify a higher cap on the ratio of a borrower’s debt-to-income, it could permanently expand the set of mortgages Fannie and Freddie back.

CFPB Director Kathy Kraninger, in remarks to reporters to announce the changes, said the bureau had made no decision on whether to adjust the existing debt-to-income requirements.

Mark Calabria, the new head of Fannie and Freddie’s federal regulator, who participated in the press conference with Ms. Kraninger, said his goal is to ensure the companies operate on a level playing field with other market players. He played down concerns about potentially crimping access to credit.

“Adverse economic impact is not a legal justification for ignoring statute,” he said.

When the Consumer Financial Protection Bureau introduced tighter mortgage-lending standards after the financial crisis, it deployed temporary measures to avoid cutting off some borrowers’ credit access. This exception was nicknamed the “qualified mortgage patch” and allowed Fannie and Freddie to purchase high debt-to-income mortgages. That ratio measures how much borrowers spend on mortgage payments and other debts relative to their monthly income. More Americans have had to stretch to buy homes as home prices have risen rapidly.

Fannie Mae and Freddie Mac back about half of new mortgages in the U.S. Now, talks are heating up about reshaping or shrinking the two companies, a move that could impact millions of Americans. Photo: Heather Seidel/The Wall Street Journal

In recent years Fannie and Freddie have loaded up on loans with debt-to-income ratios above 43%, the typical cutoff under postcrisis rules. The Urban Institute, a think tank, estimated that an additional 3.3 million mortgages were originated between 2014 and 2018 using the patch. Seen another way, Fannie and Freddie purchased more than a quarter trillion dollars of loans last year that wouldn’t have counted as a “qualified mortgage” without the patch, according to data tracker


Thursday’s proposal would allow the patch to expire as scheduled in January 2021, or after a short extension if necessary. Meanwhile, the CFPB began to work on what could serve as a replacement for the patch, requesting public feedback on what that replacement should look like but stopping short of outlining a specific proposal.

The CFPB will collect feedback on Thursday’s request for 45 days.

“I believe the patch should expire according to its terms,” said Ed Pinto, co-director of the conservative American Enterprise Institute’s Housing Center, who has researched the issue and plans to submit a comment. Maintaining the cap would bulwark against loose lending, he said.

Others are urging regulators to adopt alternatives to the existing debt-to-income cap. A better barometer for determining whether a borrower will repay, they say, is the price individuals receive on their home loan.

“If they don’t take action, millions of borrowers will lose access to mortgages or pay higher prices,” said Eric Stein, senior vice president at Self-Help, a family of credit unions and parent to the Center for Responsible Lending consumer group.

Write to Andrew Ackerman at and Ben Eisen at

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