Government Lending

What the industry wants from the FHFA, and what it may get

How does the mortgage market’s desire for predictability figure into Biden’s agenda?

HW+ Sandra Thompson + Joe Biden
President Joe Biden and Sandra Thompson, Acting Director of the FHFA

Just hours after the Biden administration appointed Sandra Thompson, a longtime regulator, to take the wheel at the Federal Housing Finance Agency (FHFA), a group representing independent mortgage bankers had some suggestions.

But first, the Community Home Lender Association made it clear to Thompson and U.S. Treasury Department Secretary Janet Yellen that it wanted to put the policies of the last administration in the rearview window.

“Neither of you were involved in the adoption of the January PSPA restrictions, which were implemented just days before the outgoing Administration left office,” the letter said.

The Washington, D.C.-based trade group went on to ask that the 7% cap on GSE purchases of mortgages for investment properties and second homes be ultimately eliminated. It also asked that the $1.5 billion individual lender cash window cap be raised to $5 billion, remedying a policy that it said created “arbitrage profit opportunities for Wall Street Banks.”

In her first week as acting director of the FHFA, Thompson has taken actions to preemptively align Fannie Mae and Freddie Mac servicers with a rule to safeguard borrowers. She lowered barriers for COVID-19-impacted borrowers to reduce their interest rates. She has also reiterated the Biden administration’s commitment to closing the racial homeownership gap.

As the conservator of the GSEs, which secure half of the $11 trillion market of single-family mortgages, the FHFA director can impact pricing and credit availability in a way no other single person can. While the Biden administration determines the FHFA’s role in furthering its agenda, industry stakeholders hope Thompson, who has a reputation for working with the industry – not against it – will not make abrupt changes.

Ed DeMarco, the president of the Housing Policy Council, led the FHFA in the years following the recession, and hired Thompson in 2013. He described Thompson as a “pro’s pro.” Under her leadership at FHFA, DeMarco said he hoped to see more advance warning of business changes to have “smooth transitions.”

“When there are sudden changes in the terms of the transaction, the pipeline gets disrupted. That’s not a good way to do business,” DeMarco said. “Whatever policy changes may await, I expect she’ll be more sensitive.”

Out of a job

Two days after the Biden administration removed him as director of the FHFA, Mark Calabria tweeted, “Reminder that you can have housing be a great investment or have housing be affordable, you cannot have both, choose wisely.”

For the housing industry, it was a further provocation by Calabria, who was regarded by many as disruptive. The former Cato Institute economist had burned so many bridges that, according to lobbyists HousingWire spoke with, he would find it difficult to find a job in the housing finance industry.

Calabria did not respond to multiple requests to comment.

The housing industry is optimistic that the acting FHFA director doesn’t plan to rattle the nation’s housing finance system. But there could be tension if the Biden administration takes sudden actions in service to fulfilling its racial equity agenda.

“[Thompson] understands how regulators should work with the business community and understands some of the tradeoffs,” said DeMarco.

Progressives have criticized the Biden administration for not yet nominating a permanent director. Two names that have surfaced as potential nominees, Mark Zandi, chief economist at credit rating agency Moody’s Analytics, and Jim Parrott, a former Obama official, have in the past supported eliminating the GSEs’ affordability mandates, Politico reported.

In public statements, Thompson has indicated she will leverage FHFA’s influence over the housing market to make it more equitable. It is not clear how she plans to accomplish that goal, but FHFA is well-positioned to expand credit availability at a national scale.

While Fannie Mae and Freddie Mac are in conservatorship, the federal government has an extraordinary amount of control over the housing finance system.

Conservatorship arose in the wake of the recession, when the GSEs were underwater with non-performing loans. After the housing bubble burst, 240,000 Black families lost their homes to foreclosure, according to a study by the Center for Responsible Lending. An economic downturn and credit tightening in the years to follow kept low-income borrowers from accessing credit, the Urban Institute found. The racial homeownership gap is now as large as it was when the Fair Housing Act was enacted, and some are calling for the FHFA to narrow it.

One possible avenue is to expand the GSEs footprint — and the government’s control over the companies — after years spent trying to reduce it.

Dan Immergluck, a professor at Georgia State University, has argued for increased government control over the housing market, through a government-owned, utility-like structure for Fannie and Freddie.

At the heart of the model, he writes, “lies the ability to create a more just housing finance system where Black homeowners do not pay what amounts to a racial legacy tax in the mortgage market.”

Immergluck argues that would allow for the elimination of “risk-based pricing,” which penalizes those with less wealth and lower credit scores. The GSEs could accomplish that through cross-subsidization, or using profits from loans made to wealthier, high-credit borrowers as an offset.

The Biden administration has shown no interest in freeing the GSEs from conservatorship, although it’s not clear Biden would make a wholesale change to how the nation’s finance system operates.

But even without doing so, Mortgage Bankers Association CEO Robert Broeksmit said that he believes Thompson’s FHFA will much more vigorously seek ways to provide financing for “sustainable housing,” particularly to lower and moderate income communities and communities of color.

“I do not believe that was Calabria’s priority, but it’s clear that the economics and the profitability metrics of the GSEs permit significantly greater lending to those communities,” said Broeksmit.

During the first week in her new role, Thompson has been outspoken about her commitment to racial equity in housing. On Thursday morning, the agency released a statement outlining its fair lending oversight and enforcement policies.

“Illegal discrimination has not and will not be tolerated by FHFA,” said Thompson. “FHFA is committed to fair mortgage lending because it ensures that all Americans have equal access to safe, decent, and affordable housing.”

Industry wishlist

Of course, there are some additional matters the housing industry would like the FHFA to prioritize.

In the short term, the MBA hopes the FHFA will eliminate the adverse market refinance fee.

Last year, the FHFA said that “increased costs and risk” to the agency, due to Covid-19, led it to impose the extra 50 basis point fee on most refinances.

Many lenders didn’t buy the stated rationale. Critics of the policy argued that Calabria simply saw an opportunity to increase the GSEs capital levels quickly, during last year’s refinance boom.

The volume cap on investment purchases, which the FHFA hammered out with the Treasury Department in March, is another policy change that rankled industry stakeholders.

In March, a preferred stock purchase agreement with the Treasury imposed a 7% limit on the GSEs acquisition of single-family mortgage loans secured by second home and investment properties.

The GSEs implemented the change swiftly, requiring some lenders to adjust their loan deliveries as early as April.

The MBA sait it would not ask the FHFA to immediately eliminate the cap on investor properties. It would, however, push for flexibility on timing to meet the 7% cap on investment properties.

But in the medium term, pending negotiations between the FHFA and the Treasury, the MBA would like for the investment property caps to be eliminated. Like the CHLA, the MBA would like to revisit the $1.5 billion cash window limit.

In March, the MBA warned that the requirement could force several dozen lenders to rely more on mortgage-backed security swaps, sales of loans to correspondent aggregators, or shift their business mix to other loan products.

At the onset of the pandemic, Fannie Mae and Freddie Mac shut down issuance of credit risk transfers. There was investor uncertainty regarding how federal agencies and the GSEs would treat credit risk payments while borrowers were in forbearance.

In June, when agencies provided more clarity, Freddie Mac resumed issuing CRT. Since July, it has issued more than $10 billion in CRTs. Fannie Mae has not issued any.

That’s in part because the FHFA’s capital rule made changes to the capital framework, making it more expensive to issue CRTs.

Fannie Mae’s now 15-month hiatus from CRT issuance is one thing DeMarco, who pioneered the policy in 2013, would like to see the FHFA reassess. The mortgage industry, including the lenders the Housing Policy Council represents, want to diversify those who hold credit risk, rather than concentrate it in fewer hands.

“We were all saying the same thing: the treatment of CRT is too harsh,” said DeMarco. “Lenders in it for the long haul want to avoid the possibility of systemic disruptions in the mortgage market.”

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