FHFA’s new unfavorable market fees are disastrous for lenders
Some time ago, we criticized Ginnie Mae for issuing new guidelines on early repurchases of reproductive loans (“The problem with Ginnie Mae’s new restrictions“). We knew at the time that the people of Ginnie Mae didn’t like making the changes, but maybe we should have said the same. And since then, several HUD officials have told us emphatically that they are not managing prepayment rates.
“As with refinances, buybacks can cause economic loss to security holders when mortgage-backed securities trade for higher prices. Generally, the risk of such losses is a normal consequence of investing in this asset class, ”HUD noted in a blog post (“Ginnie Mae announces temporary pooling restrictions for reproductive mortgages“).
The mortgage industry was also not happy with the changes to Ginnie Mae, but it adapted and continued to focus on record loan production volumes. Big banks like Wells Fargo will indeed continue to make early repurchases of delinquent loans from Ginnie Mae – and keep them in their portfolios.
It’s important to clarify that Ginnie Mae and her transmitters ultimately work together due to commonality of goals and needs. Ginnie Mae acts with and through its bank and non-bank issuers, creating an important reason for compromise and constructive action to protect consumers and the securities market for Ginnie Mae’s mortgage-backed securities.
Unfortunately, the conventional loan market lacks this basic consensus, in large part because the Federal Housing Finance Agency is a fundamentally conflicting agency. While GSEs hold conventional MBS loans, they allow issuers to manage these residential mortgages – assets that Fannie and Freddie ultimately guarantee.
This week it was announced that “Fannie Mae and Freddie Mac will impose ‘adverse market charges’ of 0.5% on most mortgages refinanced from September 1 due to economic uncertainty,” Hannah Lang reports in NMN. “The upcoming unfavorable market charges could actually increase costs for consumers looking to refinance, to the tune of $ 1,400 for the average consumer,” estimates the Mortgage Bankers Association.
The reckless action of the FHFA shows how deep the potential capital shortfall is to support the losses lurking in Fannie Mae and Freddie Mac. The FHFA is in conflict between supporting the finances of companies, which it wishes to see privatized, and acting as a prudential regulator. The measures taken by the director of the FHFA, Mark Calabria, for the benefit of the private shareholders of Fannie Mae and Freddie Mae ultimately cost the taxpayer dearly.
And the FHFA’s action illustrates, once again, another conflict between an objective mortgage regulator and the economic agenda pursued by the Federal Open Market Committee. Think of the change that takes effect on September 1 as a first scene from the movie “The Godfather”. Vito Corleone tells his son Michael that he has to “get his mouth wet”.
Calabria effectively forfeits a third of the 150bp net income from retail mortgage lending business, but most of the around 70bp is typically made on the corresponding loans. We wonder if the FHFA has taken into account the economic impact of its actions, especially on small issuers and low-income households. Probably not.
But perhaps more worryingly, the action of the FHFA is directly in conflict with the policies of the FOMC, which deliberately uses low interest rates and high volumes of loan refinancing across sectors to boost the economy. American paralyzed. One could even characterize Calabria’s actions as an attempt to sabotage the action of the FOMC and the economic recovery that is the focal point of the Trump White House.
“Tonight’s announcement by the GSEs runs counter to recent executive actions by the administration urging federal agencies to take all steps within their authorities to support distressed homeowners,” said Bob Broeksmit, CEO of the Mortgage Bankers Association.
“Director Calabria’s directive requiring Fannie Mae and Freddie Mac to impose a 50 basis point price increase on all refinancings effective September 1 is a surprisingly brazen confiscation, and it should not stand. It will cost lenders hundreds of millions of dollars first, as most of your huge, locked down pipelines cannot be shut down and delivered by the end of August, and it will cost, starting today, billions to consumers in the midst of a pandemic when the administration claims to be working for relief and revival of the struggling economy.
While this move will increase the cost of a loan for consumers, the industry will continue in much of business as usual, as the monthly payment will only increase by a few dollars. But overall, Calabria’s change will shift billions from the hands of American consumers to the hands of Fannie Mae and Freddie Mac – and their private shareholders.
How does Calabria justify this grotesque conflict of interest on the part of his office? House Financial Services President Maxine Waters, D-Calif., Is expected to ask Calabria that same question.
The FHFA press masters tried to pass off the sudden and inexplicable change as being at the behest of the GSEs themselves. In fact, several FHFA officials told NMN that Fannie and Freddie’s managers weren’t even aware of the change until hours before it was announced.
Once again, Calabria’s unconventional ideas and lack of financial experience seem to have created a new political storm for President Trump, who needs the support of the housing industry to defeat Joe Biden and Kamala Harris in November.
“The FHFA could have at least made the change effective on October 1,” an angry transmitter told NMN. “This change will cost me millions of dollars on outstanding loans that did not take this loan price adjustment into account. Our total cost of production for conventional refinance loans has just increased by $ 1,400. We are going to lose as much on every pipeline loan that we sell to GSEs now. ”
While this commentary was in press, mortgage industry executives are asking the Calabrian director to reverse his decision and rescind the 50bp LLPA for conventional refinancing loans. But whether or not the FHFA gives in to its latest statement, the point is that high volumes of mortgage refinancing are likely to persist.
The cost of Calabria’s refinancing tax will bear the greatest burden on low-income households, who tend to see lower execution in good times, but who suffer the most when issuers choose loans to close and loans. to give up. This is the real cost of the Calabrian tax on mortgage refinancing.