Research from the Urban Institute shows DTI to be a highly unreliable predictor of mortgage default. While lenders consider DTI in meeting new ability to pay mandates
, they also evaluate employment history, credit scores, liquid reserves and residual income.
Since the Great Recession, risky mortgage products have been purged, and Fannie Mae, Freddie Mac and the Federal Housing Administration have taken significant additional steps to reduce risk in their programs. Fannie and Freddie have been transferring mortgage-loan risk to private investors on a large portion of their guaranteed loans and have a complex system that requires increased fees on loans with higher-risk features. The FHA has increased scrutiny on higher DTI applications.
The formula for sound and liquid mortgage markets is not a single, flawed measure of a borrower’s debt relative to income but, rather, requires Congress to build on the safeguards
already in place in enacting comprehensive housing finance reform legislation.
The writer is the chairman of the National Association of Home Builders.