Trending Thursday: Housing, mortgage finance getting a break from Washington?

Plus untying Fannie, Freddie and the whole Gordian knot of conservatorship

Trending Thursday is a roundup of the stories shaping the week and what’s yet to come through the weekend — also taking into account social media reaction. Think of it as a midweek Monday Morning Cup of Coffee, but with extra caffeine.

The Senate Committee on Banking, Housing and Urban Affairs just passed “The Financial Regulatory Improvement Act of 2015.”

This is a big deal for housing and mortgage finance. Among the most significant proposals in the 216-page draft bill is a requirement raising the SIFI bank threshold from $50 billion to $500 billion, altering the $10 billion threshold, and targeting specific GSE changes. This would, in effect, free smaller lenders from the heavy capital requirements and strict oversight currently enforced against the big banks. It also includes a provision increasing the $50 billion SIFI threshold to $500 billion while maintaining some degree of FSOC review.

Other proposals in the bill take aim at mortgage finance firms Fannie Mae and Freddie Mac, "systemically important" designations to non-banks and insurance industry supervision.

Additionally, the bill would require the Federal Housing Finance Agency to withdraw its proposed rule revising Federal Home Loan Bank membership requirements while GAO studies the issue, and grant credit unions parity with community banks in the definition of community financial institutions under the Federal Home Loan Bank Act.

The trades are happy with where things are going.

“We applaud committee members for moving the bill forward, and we welcome more progress being made on behalf of credit union regulatory relief,” said National Association of Federal Credit Unions President and CEO Dan Berger. “This is a positive development and a solid step forward in overcoming the regulatory overburden the credit union industry now faces. However, more needs to be done – and we are working on the development of a bipartisan approach to get the job done.” 

“We are pleased that the discussion draft has a number of provisions to provide regulatory relief to credit unions," Berger said. "We are continuing to review it and look forward to working with the chairman and committee members prior to next week's mark-up to help advance NAFCU's priorities for credit union regulatory relief."

Draft legislation introduced by U.S. Sen. Richard Shelby, R-Alabama, would revise mortgage rules authorized under the Dodd-Frank Wall Street Reform Act to improve borrowers’ access to credit. The bill would allow for most loans that lenders hold in portfolio to be classified as qualified mortgages for the purpose of determining their compliance with the Consumer Financial Protection Bureau’s Ability-to-Repay rule. This automatic classification would not apply to negative amortization or interest-only loans, or loans that do not comply with Dodd-Frank’s limits on prepayment penalties.

The draft would also increase the amount of loans that are eligible to be considered QM by excluding from the points and fees calculation any escrow payments the lender charges the borrower for future insurance payments. Under the Ability-to-Repay rule, no mortgage can be considered a QM if the points and fees charged on the loan exceeds 3% of the loan’s principal amount. Many lenders have argued that it is unfair for escrow payments to count toward the cap on a loan’s points and fees, since such payments are collected for the borrower’s benefit. 

Of peak interest to many lenders as the Aug. 1 deadline approaches, the draft legislation modifies Dodd’s Frank’s integrated mortgage disclosure requirements by waiving the requirement that lenders must provide borrowers three days to review amended loan disclosures if the only change made were a reduction in the borrowers’ interest rate.

Shelby’s draft also includes a number of provisions intended to set up the housing finance system for eventual reform. 

Fannie Mae and Freddie Mac would be prohibited from using any revenue they may generate from increasing their guarantee fees for any purpose besides supporting their business functions or carrying out any housing finance reform legislation that Congress may pass in the future. This would appear to prevent both Fannie Mae and Freddie Mac from contributing any revenue they generate from increased guarantee fees to the Housing Trust Fund.

Fannie Mae and Freddie Mac would also be expected to increase the amount of risk sharing they enter into with private investors by 50% each year. 

The bill would also prevent the U.S. Treasury from selling the preferred stock it currently owns in Fannie Mae and Freddie Mac until ordered to do by Congress, asserting that it is Congress’ role to reform the housing finance system. 

Pressure is building on the question of why the government is being so secretive about all matters related to the government’s takeover and profit sweep of the GSEs, and it’s in no small part due to the yeoman’s work being done by Gretchen Morgenson at the New York Times.

She spoke in Minnesota at the Society of Professional Journalists’ Page One awards and raised the interest of several journalists.

And it shouldn’t take her harangue; regardless of what one thinks of #FannieGate, the government’s actions and assertions of privilege are an affront to the ideals of open government and a free press.  

Some people get it. From the Minneapolis Post:

Morgenson's comments were part of a talk she made last night in Minneapolis. She was the featured speaker at the annual awards banquet of the Minnesota Chapter of the Society of Professional Journalists.

Fannie Mae is the huge, government-controlled entity which, together with its much smaller and younger brother, Freddie Mac, still dominates the market for purchasing and guaranteeing home mortgages. Shareholders of both entities have been hammered since 2008. That September, the federal government rushed to bail them out in the financial meltdown, with $187.5 billion in taxpayers' funds. Now, finally back in the black, they have paid back $40 billion more than they received in the bailout, yet the government is still sweeping their profits into the U.S. Treasury.

Last month Morgenson reported on government secrecy that has followed the filing of a lawsuit by Fairholme Fund, a mutual fund company holding stock in both Fannie and Freddie. It charged in the suit that the government's sweeps are improperly taking private property. Morgenson reported that the sweeps are also preventing both companies from building up a larger capital cushion to absorb future losses, should they arise.

The government responded to the lawsuit by listing 231 documents as off limits in the case. It cited "presidential privilege" in 45 of the documents — emails, draft memos and news releases. Grassley has been pressing the U.S. Justice Department for more disclosures about the sweep and for documents being withheld in the Fairholme litigation.

But last night, Morgenson noted that since her column, the Justice Department has asked the judge presiding in the litigation to seal yet more documents.

“Most transparent administration in history.”

The Mortgage Bankers Association is continuing its dogged efforts to get the FHA to change its Project Capital Needs Assessment requirements, because they are putting multifamily lenders in a squeeze at a time when wages are stagnant, job growth is tepid and affordable housing is a growing concern.

The changes to the PCNA standards, multifamily lenders say, requires apartment owners to put away too much money on reserve to keep the properties up. This reserve, which is for repair and replacement costs, originally had a requirement of 10-12 years, but the new reserve requirement is 20 years.

“MBA appreciates the progress made in the CNA provisions. We also firmly believe improvements should be made to the guidance to ensure that HUD and its lender partners can provide financing to rental housing for families of modest incomes. We underscore the following concerns, along with our recommended policy revisions,” MBA wrote in a recent letter to HUD. 

Those concerns include:

The current minimum replacement reserve balance requirement is increasing the overall reserve contributions on every transaction. In most cases, there is a peak year or two of reserve needs that causes the Initial Deposit to Replacement Reserves (IDRR), as well as the Annual Deposit to Replacement Reserves (ADRR) to over-compensate for those peak years. In almost every proposed R4R schedule, this causes the proposed R4R for the 20 year schedule to be severely overfunded by the end of the term. Most projects financed prior to the current guidance are retaining sufficient funds in the R4R accounts, when comparing the current balance to the R4R schedule set under guidance prior to HN 2012-27.

The previous guidance focused in practice on the first ten years, or “Near Term” requirements for the property, as compared to a 20 year R4R schedule in place today. And when 10 year PCNAs are being ordered, the results show that most of the projects have sufficient reserves in places, even with the more stringent requirements, proving further that the previous guidance was sufficient. One analysis below shows the impact of funds required under current guidance.

The property backed by this specific loan was built in 1978, was workforce housing, and was in good condition overall. For purposes of comparison, we have shown the Fannie Mae numbers, because this loan ended up being financed via Fannie Mae after the HUD PCNA (with 20 year schedule) was presented to the borrower. Under a 12 year schedule, the borrower’s required repairs and initial deposit decrease by over $824,000, while, in our view, still providing sufficient funds to the R4R account. 

The new normal for new home sales? Dr. HousingBubble (not a medical doctor) writes that new home prices are at record high, but builders still aren’t jumping in because they are reluctant to build on low sales volume.

Housing inventory continues to remain tight across the United States. It would seem logical that home builders would be taking the plunge to build homes for future buyers. But that is a bet that is looking into the future. Builders continue to bet with their budgets that the United States is deep in a rental trend. Keep in mind that new home prices are going up steadily. Yet the push up is coming on lower volume and higher priced homes going to a smaller portion of the population. Investors are largely not interested in new homes with higher premium prices. They are largely focused on discounted prices from existing home sales. 

Read the rest here.

Over at ZeroHedge, they note that it must be some kind of recovery when you have no less than six Republican governors who want to raise taxes

3d rendering of a row of luxury townhouses along a street

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