Quo Vadis QM?

In this report, we assess the business incentives created by the new CFPB qualified-mortgage (QM) rule to determine the degree to which adverse-selection incentives are created and, if so, who wins and loses. We conclude that GSE fees create a driver that encourages those banks with portfolio capacity to originate riskier loans that still meet GSE criteria and, then, to hold these loans in portfolio — GSE fees can well be the difference between a comfy safe harbor and the riskier rebuttable-presumption protection afforded higher-priced QMs. However, the FHA wins the big prize because its premiums don’t count towards this threshold. Thus, any loan FHA could insure will still end up on its books, not transition to bank portfolios, the GSEs or whatever private market emerges.

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