How CFPB policies fueled new subprime boom, high home prices

In a recent op-ed, Chris Dodd and Barney Frank argued that Trump-era deregulation weakened the CFPB and harmed consumers. Other Democrats went further, warning of rising housing costs from these actions. But the uncomfortable truth is that it's the CFPB's own policies that have fueled rising housing costs, not restrained them.

One of the biggest culprits is the CFPB's qualified mortgage rule and the ever-expanding debt-to-income ratios allowed under it. When the QM rule was first implemented in 2014, it included a hard 43% DTI cap to ensure borrowers had the ability to repay their mortgages — a critical safeguard designed to prevent another housing crash by limiting lending to truly prime loans.

Rather than enforce this sensible standard, regulators undercut it from the start. As part of its implementation, the CFPB created the "QM Patch," allowing Fannie Mae and Freddie Mac to securitize loans with DTIs up to 45%, which in 2017 was further raised to 50%. The CFPB also let the Federal Housing Administration, Department of Veterans Affairs, and USDA's Rural Housing Services set their own caps, and FHA now allows DTIs as high as 57%.

Escalating DTI limits ignore a fundamental truth about housing markets: Prices are driven by the marginal buyer — the one most willing, or forced, to stretch their finances. Expanding credit by allowing higher DTIs doesn't create more homes; it simply fuels bidding wars and drives prices higher.

Despite claims that higher DTIs have improved affordability and expanded homeownership, the reality is the opposite. Higher DTIs are just another form of leverage, enabling borrowers to borrow more — but also forcing them to pay more, pushing home prices even further out of reach.

The numbers tell the story. In 2013, only about a quarter of Fannie Mae, Freddie Mac, and FHA loans had DTIs above 43%; today, nearly half do. Since 2013, home prices have surged 130%, while wages have increased less than 40%.

The impact is most severe at the lower end of the market, where borrowers are more likely to take on unsustainable debt just to compete. As Federal Reserve Chair Mariner Eccles warned in 1947, if expanded credit creates more supply, that's beneficial — but if it simply enables buyers to outbid one another for scarce homes, it's dangerous.

Today, about a quarter of Fannie, Freddie, and FHA borrowers spend at least half of their pre-tax income on housing, leaving little room for savings, emergencies, or long-term stability. Combined with inflation, rising property taxes, and soaring insurance costs, homeownership is becoming less sustainable — not more accessible.

With a recession looming, the risk of widespread financial strain is only growing. While some argue that DTIs don't matter in booming economies, they matter in every downturn, when incomes shrink, costs rise, and borrowers are left exposed. And when the system cracks, taxpayers will be left holding the bag from another subprime loan boom.

Rather than correcting course, the CFPB doubled down. In 2021, it rewrote the QM rule, eliminating the DTI cap and replacing it with a rate-based test linked to the Average Prime Offer Rate. This shift, we warned at the time, is a flawed measure of risk that does nothing to prevent home price inflation — and indeed, DTIs in both government and private sector, where the original 43% cap was binding, have surged since.

The CFPB and other regulators, backed by political allies, have prioritized short-term home price growth over long-term stability and sustainable wealth-building. Ignoring basic economics, they've fueled the very affordability crisis they now blame on deregulation—when it's their own reckless policies at fault.

If policymakers truly care about affordability, they must stop pretending that endless mortgage credit is the answer. Instead, they should reinstate a hard DTI cap. RHS, with its 41% DTI limit, proves responsible lending is possible without shutting out buyers.

Like a prisoner's dilemma, homebuyers would be better off if all agencies enforced strict DTI limits. The same borrowers would still buy homes — but with safer, more affordable debt. Instead, the CFPB created a regulatory free-for-all, letting government agencies compete in a race to the top on DTIs. What's harmed consumers has been a windfall for homeowners, realtors, and bankers. If that was the goal, Elizabeth Warren badly misnamed the Consumer Financial Protection Bureau.