NAHREP’s Limón outlines concerns with GSE patch expiration

SVP of Public Policy and Industry Relations Noerena Limón discusses with Scotsman Guide the detriment to Latino homeownership opportunities, should alternative mortgage qualification options from “the patch” expire.

By Arnie Aurellano

August 21, 2019


The mortgage and housing industries have been abuzz about the recent announcement that the Consumer Financial Protection Bureau (CFPB) plans to allow the “GSE patch” to expire in January 2021.

For more perspective on the upcoming shift, Scotsman Guide News spoke to Noerena Limón, senior vice president of public policy and industry relations at the National Association of Hispanic Real Estate Professionals (NAHREP). Her organization has been critical of the CFPB’s decision to sunset the patch, and with the CFPB requesting comment on the issue through its advance notice of proposed rulemaking, NAHREP has been working with other industry groups on bringing concerns and potential alternatives to light.

What was the initial reaction at NAHREP when the CFPB announced the intention to the let the patch expire?

We’ve been looking at this issue for some time. … This is something that we knew was coming, though we didn’t know where [the CFPB] were going to land on this issue. It wasn’t necessarily a surprise. But I do think that it is an opportunity for stakeholders to look at this issue and to really analyze what works in the original ability-to-repay rule and what could be improved on.

We are optimistic that a broad coalition of industry stakeholders and consumer advocates alike can come together to really coalesce around a solution to the expiration of the patch, to work on ensuring that we expand access to credit while, at the same time, we maintain necessary consumer protection.

NAHREP has been vocal that the expiration of the patch would be harmful to various minority-borrower groups. Can you elaborate?

There’s data that shows it. Now, if we look at the patch expiring, the most detrimental aspect of it is that the way that the patch is written, loans that are originated above a 43% debt-to-income (DTI) ratio that are currently fully eligible to be purchased by Fannie [Mae] and Freddie [Mac] are going to go away. That leaves those borrowers only with FHA (Federal Housing Administration) loans as an option.

There’s a lot of uncertainty around what happens to those borrowers. The reason that we’re concerned is that Latinos are disproportionately going to be impacted by that slice that’s going to go away. For example, the Urban Institute calculated that in 2017, about one in five GSE-backed mortgages originated had a DTI ratio over 43%. Well, Hispanics were 38% more likely to have a high-DTI loan — the most likely of any demographic.

Debt-to-income ratio is widely recognized as a weak predictor of default and one’s ability to repay. We don’t want to return to the same loose underwriting standards that happened before the [Great Recession]. But at the same time, we want to ensure that [Latinos] have access to the No. 1 wealth-building tool in this nation, which is homeownership.

Can you talk about the consequences of the patch’s expiration on the market as a whole?

I think it’s important to look at a broad perspective of the market. I think that we cannot talk about some of these huge housing-policy decisions without understanding who is going to be impacted. If we look at the housing market today, housing demand for homeownership is being driven by Latinos. And so, it’s important to understand what the dynamics or where the cutoff lines are going to be for the credit box, or for access to credit and seeing where Latinos are going to lie in that decision.

Latinos are the future of the housing market and that will have ramifications on the healthy market as a whole. The data shows that Hispanics are projected to account for more than half of all new potential homeowners over the next several years, and for 56% of new homeowners by 2030. And if we look at Latinos right now, the median age is 29, so Hispanics are just entering the prime homebuying years, further increasing homeownership potential for decades to come.

What’s important to us is to ensure that the narrative about the role that the Latino homeowner is going to play in the market is front and center, definitely. We’re at a point where Latinos are right now the only demographic to have increased their homeownership rate for the past four consecutive years. When we’re looking at homeownership rates overall going down, we think that it’s shortsighted not to understand the ramifications that making this decision is going to have on the entire market. … That is going to be a contraction of the market, particularly as we are looking at what could be a possible contraction of our economy. This is not the time to do that.

What does NAHREP believe is the ultimate solution to the patch-expiration issue?

First of all, we don’t believe that the debt-to-income ratio is the best way to determine a customer’s capacity to repay. I think, more than anything, we believe that we should expand the way that we define a qualified mortgage. We also believe that there should be a better way than Appendix Q [of the ability-to-repay underwriting rule] to determine income and debt. This has been really hard on self-employed borrowers, gig-economy workers or non-W2 workers, which [are demographics that are] increasingly being driven by communities in color. I think there are a lot of opportunities here to maintain what works and find better alternatives [for what doesn’t]. … NAHREP is still working with various stakeholders to see where the best alternative is.

Do you think there is enough time between now and the January 2021 expiration date to find a solution?

I am optimistic. Our letters [in response to the CFPB’s request for comment] are due on Sept. 15. I think there are several things that most stakeholders agree with: not letting the patch expire without replacing it with something, getting rid of DTI as the determinant of qualified mortgages, [and] amending or replacing Appendix Q. I am optimistic, given the broad coalition of people who are working together to find a solution, that we can come in with a united voice. I am optimistic that we could replace [the patch] with something that is more conducive to the changing face of homeownership.

One of the things that I want to highlight is that, at NAHREP, we have a goal of reaching a 50% homeownership rate [for Latinos]. We’ve never, as a community, reached that. We’re very close. We’re at 47.1%. Our goal is to reach a 50% homeownership rate by 2024, so the way that we analyze our policy positions revolve around that singular goal. I think that the decision that comes out of this will be the most significant to reaching that goal.