There is a well-known analogy about a frog and a pot of water. If you drop a frog into a boiling pot of water, the frog will jump out. However, if you drop a frog into a saucepan of cold water and slowly turn up the heat, the frog will boil. Personally, I think the frog is in trouble either way, but that’s beside the point. In the time since Mark Calabria at the helm of FHFAThere has been both a steady stream of GSE executives leaving and a multitude of actions that are having a negative impact on the housing sector. The most surprising truth here is that the mortgage industry, flooded with last year’s earnings, almost ignored these moves.
Of CEOs to Managing directorsthe exodus was pronounced under the Calabrian government. And why not? After all, a CEO of one of these companies doesn’t actually work for their board of directors. In fact, he works for an FHFA director who oversees everything from hiring decisions for executives to public communications to mortgage policy.
For those who have had careers in this sector and have run large organizations, I can only imagine how frustrating it could be to report to an official who has never been in the industry or something close to their responsibilities ran this company.
More importantly, it is probably just as frustrating to know that the person in charge of your future has, for the time being, a philosophical zeal towards the company in which you are leading.
Politically, the slow but steady departure from the programs of the GSEs has cumulatively diminished the presence of these two giants in the financial services space. Most of all, this includes the new capital rule through various political surprises after the passage of the CARES law recent political proclamations quietly crept into an amendment to the Preferred Stock Purchase Agreement (PSPA) in January. Calabria has been tracking results it openly addressed about these companies a decade ago.
Indeed in his testimony from 2011Calabria specifically asked a lot of what it has done so far. In this testimony that also from the CATO instituteHe called for the GSEs to be received, employees to be paid for the state salary plan, and capital to be raised to banking standards.
He also wanted to eliminate Investor properties and second homesin order to lower credit limits, only allow loans that have the CFPB QM rule definition and much more. And from then until now, Calabria has deliberately followed these results.
Not everything the FHFA director did was bad. For example, one of the elements in the recent PSPA change states that the GSEs “cannot vary the pricing or other term of the seller’s purchase … based on size, type of charter, or volume of business.” This level of competition now stipulated in the contract for these companies is common to many endorsed for several years.
But this amendment does so much to reflect the views we have expressed earlier. The percentage of cash purchases will be capped at $ 1.5 billion in four quarters, affecting many medium and large non-bank sellers as well as some community banks. A credit quality threshold is set, which sets a limit for purchases of loans that contain two out of three specified risk factors (I AM, DTI and LTV).
These policies have alerted affordable housing assemblies and think tanks that have focused on the minority impact as a result. It limits acquisition of investor and second home purchases to a hard-to-manage 7% over a rolling 52 week period. This change effectively removes the patch so that the GSEs must meet the requirements The final, but not yet implemented, QM rule was published on December 29, 2020.
Neither of these elements is worth undue concern, but overall they just add to the frictions introduced by the director on top of the new capital standards, refinancing fees, and much more.
Look, I understand the logic of Calabria’s intention here. The fact is, he made this so clear and policymakers know it. There is concern that the GSEs have become procyclical in the marketplace, meaning that due to their preferential treatment of capital standards and their ever-growing credit box, they could / will crowd out private capital. These recent changes are part of a systemic process to reduce the presence of these companies and a hopeful shift from government-supported mortgages to the private sector from the FHFA perspective.
But where is the private sector? Yes, there are signs of hope for a recovery in the private market. In recent years, banks have become big buyers of jumbo mortgage no agency and even some high account agencies. Remarkable efforts have been made to revitalize the private label securitization (PLS) market.
Indeed, Redwood Trust CEO Chris Abate proclaimed This in the request for results from February 10th It said, “The working capital we allocate to these businesses is expected to generate a return on equity north of 20% after tax. Most importantly, These companies serve large and growing markets that are not covered by government loan programs, and as such are positioned to generate scalable and repeatable sources of future profits, even in a less accommodative interest rate environment. ”
Unfortunately, the mortgage market’s concern here should be that the FHFA is removing the legs of the stool of the living space at a rate no replacement vehicle in the private sector can match. The type of lending outside the agency currently consists mainly of higher loan balance and credit quality than the GSEs. No program of any scale will be put in place to meet the needs of an ever-growing population of minority and other first-time buyers who come to the market with lower credit scores and less cash to buy a home.
A market that, according to the MBA, accounts for 14% of all purchases and 10% of all mortgage transactions without a buyer like the GSE, will and will lead to price increases and credit cuts.
The fact is, a broad retail investor market is facing various headwinds that have concerns about trustees and their role, the value of credit rating agencies, counterparty risk, lack of disclosure of credit level data in mortgage pools, prepayment risk, and more. And while government agencies have spent time discussing and resolving these challenges, very little has been done in a scalable way.
Indeed, PIMCO, in a Letter to Mark Calabria in September 2020, was concerned about the risk of moving to a private market too quickly and was concerned about the release of the GSEs as they would likely lose their explicit guarantee status, which would result in a very negative market reaction. “Mortgage Prices will increase, home ownership is likely to suffer, and the national mortgage rate will no longer exist, ”wrote the executives.
Chris Whalen published a piece in the Institutional risk analyst headed “Joe Biden Must Dismiss FHFA Director Calabria”. In this article, which focuses on Calabria’s efforts to clear the GSEs, Whalen joined a chorus of other market participants and stated, “Calabria’s real agenda appears to be the GSEs and the Independent Mortgage Lenders (IMBs) they operate with are crippling the conventional $ 6 trillion market. “
The unfortunate calm response, with the exception of some industries that have tried to deliver professional and measured responses, is due to a simple reality. The mortgage industry can be short-sighted at times. After a year like this, there was little preparation for the volatility to come. The upcoming market will be more challenging as interest rates rise, volumes slow, margins compress, and lender competition becomes tougher.
In some cases, Calabria’s actions simply shift business from the GSEs to the other government-sponsored programs FHA, become, and USDA. In other cases, the loans are simply not granted because they are “out of the money” in terms of consumer appeal. And yes, an increase in private capital will help fill some of the product gaps, but that is not yet to be seen in the order of magnitude.
But the proverbial frog in the pot analogy applies here, and the negative impact of this director’s actions on the mortgage industry is evident. It’s not that the nation should always rely on the GSE like this. But the fact is that the regulatory infrastructure is part of it Treasury Department, HUD, FHFA, CFPB, OCC, and SEC All play a role in the return of a functioning private sector.
If Calabria simply pulls its legs off the stool in support of the case, some segments will fall to the back. In other words, the water is now hotter and not quite boiling yet, but if it is allowed to continue, is there any reason to believe it will not come to a boil?
This column does not necessarily reflect the opinion of the editors of HousingWire or its owners.
How to contact the author of this story:
Dave Stevens at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]