The most powerful person in mortgage lending is about to be replaced

What does a new FHFA director mean to our market?

The director of the Federal Housing Finance Agency oversees operations at Fannie Mae and Freddie Mac, from a regulatory point of view.

It’s arguable that FHFA Director Mel Watt, though weakened recently in light of misconduct allegations, at one point yielded considerable power over the GSEs.

Now, in two month’s time, President Donald Trump will be able to replace Watt, and there will also be new leadership at Fannie and Freddie. The represents a decisive opportunity for housing reform, something Trump has long supported.

But what does it means that the most powerful person in mortgage lending is about to be replaced? Analysts at Wells Fargo Securities think they have the answer.

For one, the footprint of the GSEs in the mortgage lending and securities markets will need to be reduced. The team at Wells, led by managing director Vipul Jain, names three potential developments a new, Trump-appointed FHFA director would have on the broader mortgage market in an email to clients this morning.

Two changes will be from aspects that are directly controlled by the FHFA — loan limits and g-fees, while the third one relates to the temporary GSE QM exemption, sometimes called the “QM patch.”

Here are the three developments listed in the email from this morning:

G-Fee Increase May Affect Non-Agency the Most

Of the three potential GSE developments, we believe a g-fee increase would have the largest effect on the Non-Agency market. A back-of-the-envelope calculation estimates that ongoing g-fees increasing by 14 bps could put private-label security (PLS) execution at competitive levels to TBA delivery. Considering that previous g-fee raises in 2012 and earlier were in the 10-bp magnitude, the 14-bp increase does not seem implausible should the FHFA decide to reduce the GSEs’ footprint. In addition, through targeted upfront fee raises, the GSEs can also shift volume in non-core loan types more to FHA or the private market.

Lower Loan Limits May Help Portfolio Volume More

Decreasing loan limits can be an effective way to shift origination back to private capital. However, securitization rates remain low, so we believe much of that shift would just remain on balance sheets of banks and whole loan investors. A flat yield curve and a continually improving PLS market may increase incentive to securitize, and we are seeing higher issuance, but the pace remains slow.

QM Patch Expiration Fallout to Be More FHA-bound

We see the GSE QM patch expiration to have a lesser effect on the Non-Agency market in its current state, but rather would mostly affect the FHA market. However, the FHA market alone is not sufficient to absorb the fallout volume. If the patch were to expire, more fundamental changes to the QM rule may be needed to address the fallout.

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