Every originator should know that the demand by investors, whether they are portfolio lenders or owner of securities backed by mortgages, is the primary driver of the rates borrowers are offered. No lender with a warehouse line, and who must satisfy the covenants of the line, would ever offer a product that it can’t sell, or at a rate that is unattractive to investors like insurance companies, pension funds, or money managers.
And this is especially true as we make our way through 2021. The Federal Housing Finance Authority (FHFA), whose primary role is to oversee Freddie Mac and Fannie Mae, has moved to constrict the footprint of both, directly impacting the product and pricing being offered to borrowers by banks, non-depository mortgage banks, credit unions, and brokers. Thus, it is important for originators to understand what capital markets staffs are watching, and why, as it will impact nearly every home loan rate for clients.
Lenders and mortgage loan originators (MLO) are most familiar with the gfees (the collective term for guarantor and guarantee fees) charged by Fannie and Freddie. But capital markets staffs around the nation continue to keep their eyes and ears open about the implications of FHFA’s moves in the last six to eight months. Through Director Mark Calabria’s directives (sometimes in cooperation with other government agencies), Fannie and Freddie have implemented a 50-basis point adverse market fee for certain types of refinances, placed a cap on the amount of second home and non-owner occupied, and placed a $1.5 billion cap, per Agency, on the amount that lenders can sell to each through their cash windows. Each of these directly impacts the rates and prices at the borrower level.
MLOs saw the direct impact of the 50-basis point hit on rate sheets in 2020. But in addition to that, the price of acquiring a second home or investment property has become more expensive due to the cap placed on lenders. Some lenders are pricing in 2.250 percent (percentage of the loan amount) or more for second homes. This is highly impactful to vacation markets, not only in the liquidity of homes being sold, but on rental prices charged by owners to vacationing families. And the $1.5 billion cap on window sales influences rate sheet pricing for lenders who approach the cap and must instead sell conventional conforming product through securities or to aggregators at potentially a lower price.
Other steps that have been taken by the FHFA include no support for non-bank servicers during forbearance, a first payment forbearance fee policy of 500 basis points and 700 basis points, and an aggressive capital rule that handicaps Credit Risk Transfers (CRTs) and risk-based treatment in the capital markets. Although MLOs may not see the direct impact of these changes to their client’s rates, they should know that the changes do impact the way that lenders structure their capital markets activities.
For example, if a non-bank servicer does not receive the government support during forbearance that a bank servicer does, the non-bank has to direct other resources, whether they are personnel or capital, to forbearance issues. These resources may have been better used.
By handicapping CRTs, Fannie Mae and Freddie Mac are limited in their ability to transfer the risk to entities who are willing buyers of credit risk (typically hedge funds, insurance companies, pension funds, and REITs). Like typical agency bonds, CRTs pool thousands of different mortgages into a single security, and investors receive regular payments based on the performance of the underlying loans. But CRTs carry no government guarantee, and private investors could absorb losses if a large number of the loans default. GSEs retain a share of the risk for each security they issue, but the actions of the FHFA to crimp issuance of these securities has impacted liquidity in the secondary markets, thus impacting Agency activities in the primary markets.
What could be ahead for this summer that everyone, from MLOs to CEOs, is monitoring? Retiring COVID loan flexibilities is a hot topic. How punitive could the Agencies be in removing some of the flexibilities allowed borrowers since March of 2020? The Consumer Finance Protection Bureau (CFPB) and delays in Qualified Mortgage mandatory compliance dates/GSE QM delivery deadlines is another concern. These dates have been extended for now, but industry analysts expect more changes ahead, impacting the GSE “footprint.”
Lenders are also debating the merits, or lack thereof, of the FHFA’s new low-income refinance option. But research shows that the “box” borrowers must fit in for this program is very narrow, and thus the amount of help is limited.
Lastly, the Preferred Stock Purchase Agreement (PSPA) impact on underserved borrowers is being felt by borrowers. One covenant is a limit the GSEs’ purchases of high-risk single-family loans to six percent of their purchase money mortgages and three percent of their refinance mortgages. A high-risk loan has at least two of the following characteristics: the loan is more than 90 percent of the home’s value (its loan-to-value, or LTV, ratio is above 90 percent), the borrower’s debt is more than 45 percent of their income (their debt-to-income, or DTI, ratio is above 45 percent), or the borrower has a credit score below 680. Critics say that the limits imposed in the PSPAs make little sense and are not an efficient, or effective, way for the GSEs to manage their risk and come at considerable cost to potential borrowers. These limits both disproportionately affect borrowers of color and unnecessarily constrict policy choices going forward.
All of these changes, put in motion since the fourth quarter of 2020, serve to constrict lenders and their borrowers. They are constraints and changes that originators should be aware of and understand. Remember that raising or lowering gfees is not the only method the Agencies have in determining the rates of borrowers. If you can hit the pause bottom for five minutes and just assess the risks present today versus two years ago, do the returns today make sense in terms of the new risks?
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