Sep. 12, 2012: Why the recent gfee increase? Why the annual Fannie sales cap? Will there be more? Link to buyback rep & warrant announcement
Rob Chrisman
The
U.S. Government now has a $16 trillion deficit. On the other
hand, it made about $12 billion on the AIG stock sale -
congrats. To put those numbers in context, however, the government would have
to do an AIG deal every day, seven days a week, for nearly
four years in order to erase the current deficit.
As John Steinbeck famously said, the problem with poor
Americans is that “they don’t believe they’re poor, but
rather temporarily embarrassed millionaires.” Has the
housing market been "temporarily" down? One can never
overestimate the intelligence of the masses, but the Financial
Times reports that "Americans’ confidence in the outlook
for the housing market has risen and they believe home
prices will continue to rise in the next year, according to a
new survey by Fannie Mae." Better than believing otherwise,
right? "A rising number of people predicted mortgage rates
would go up in the next 12 months, up to 40% last month from
36% in July, while those who felt it was a good time to sell
property increased to 18 per cent from 16 per cent. The number
of people surveyed who predicted house prices would increase
remained steady in August at 35%, but was up from 20% a year
ago. Americans expect house prices will rise on average by
1.6% in the next year."
The industry continues to wring their collective hands over
the guarantee fee increase. (I've been in the biz so
long, I remember when there was a "guarantee fee" and a
"guarantor fee", depending on the agency.) I received a note
from an industry vet, saying, in part, "The biggest fear in
our industry right now is not rising rates but that FNMA and
FHMLC, already in receivership, have been given a death
sentence with no chance of parole. It sadly appears to many of
us that, no matter how reformed and beneficial the GSE's are
to the health of housing market and our economy in general,
they are going to subjected to a slow and painful death. The
lethal injections may have already been started.”
The note continued. “Case in point, the latest G-fee increase
of .125% has already added a full 50 bps to our price on 60
day locks. I have also heard that FNMA that they are also
capping the amount of loans that new FNMA approved
seller/servicers can send directly to FNMA by capping
production at 20x their net worth. So, for example, if we
have a net worth of $10 million, we can only sell FNMA $200
million for the entire year. But we just closed nearly
$100 million in August alone so we have no choice but to send
in loans as a correspondent to the aggregators, and they in
turn service the loans, steal our customers, and sell to FNMA
without those caps in place as they are an established seller
servicer. But wait, the fun doesn't end! With the impending
Basel III reserve requirements possibly hitting even the ‘too
big to fail banks’ in the upcoming years, there is a fear that
they too will start to shrink their loan balance portfolios.
This redirects us to sell loans to the agencies, which have us
capped out!"
Here are my thoughts on this. First, a clarification that the
gfee increase may result in approximately 50 basis points
difference in price, not rate (using a 4x1 multiple).
Second, FHFA indicated that the gfee increase was intended to
help flatten out the price difference between big and small
lenders. If the average is 10 basis points, and the large
aggregators saw 12, that means to move back to the average, by
my simple calculations, plenty of "smaller guys" will see less
than 10.
Third, the guarantee fee is intended to cover expected risk
inherent in eligible deliveries. Even at the current gfee
levels, it was generally agreed that Fannie & Freddie have
been underpricing the risk on eligible loans, with support of
the Government and FHFA wanted that to change. (More on how
g-fees are set, and some theories about possible future
increases, below.)
As it relates to these repurchases, no one is going to
disagree that lender have to be financially able to repurchase
ineligible loans. If you don't think monitoring counterparty
risk is a huge issue, just ask the CFPB, or Capital One after
it paid some hefty fines for exactly that issue. Fannie needs
to manage counterparty risk, and one way to do that is by
limiting deliveries based on net worth and other factors. The
20:1 ratio you reference, based on net worth, is known to be
merely a starting point.
But
folks are asking, "How was the delivery limit set?" It
appears that Fannie took, as a starting point, the net worth
of the company. For newly approved lenders, it is hard to
gauge what future deliveries will look like, but for more
seasoned lenders, profile of deliveries and any outstanding
obligations (such as loans not repurchased) get factored into
the limit. Lenders who have delivered a better book of
business to Fannie are rewarded with a higher sales cap.
So what if you don't like the 20x1, or whatever ratio you
might have, what can a lender do? Call Fannie Mae and
talk with them about it. Another is to (gasp!) keep your
earnings in the firm rather than taking them out. Per the
MBA, independent mortgage banks' margins are very good (http://www.mbaa.org/NewsandMedia/PressCenter/81793.htm),
so now is a great time to bump up the net worth of the
company. Owners pulling out large chunks of capital in order
to shield it from potential liabilities down the road may see
this strategy backfire with lower delivery limits based on
that reduced net worth. Another strategy is to be willing to
post collateral as an alternative to increasing net worth.
I’ve heard that putting some of that liquid net worth into an
escrow/custodial account might increase whatever delivery
limit is set.
So, don't be afraid to have a conversation with Fannie
about your limits. And by the way, with all this talk
about Fannie, let's not forget Freddie. My guess is that the
FHFA gave both agencies directives, and how Fannie and Freddie
implement is up to that particular agency. So watch for
Freddie to come out with something similar.
Returning to the g-fee hike, how did the FHFA arrive at
that level of increase, and how will increases be determined
in the future? The FHFA, looking at Freddie &
Fannie's portfolio performance, realized there were
performance issues based on maturity, FICO, LTV, and several
other factors. Underwriters knew this already, right? Most
analysts who follow such things think that the G-Fee hikes
should be positive for lower coupon 30 year pools, which will
experience the biggest valuation upside. Although the FHFA has
not announced full details, the market anticipates fee hikes
on weaker credit borrowers, which should increase the price
for existing pools so investors liked the news, even if
lenders and borrowers did not: investors will hold onto the
higher yielding pools longer. (Although just like we saw in
March, the market will see a rush of refi's ahead of various
investor deadlines, which in turn are based on how long it
takes to pool and securitize the loans.)
Returning to the nitty-gritty, the g-fee hikes will reduce
cross-subsidization of high risk loans by increasing pricing
for loans with maturities greater than 15 years. The cash
window will implement these changes for commitments starting
on November 1. Differences in g-fees between lenders
delivering large volumes to the GSEs and smaller lenders will
also be reduced. Folks “in the know” say that separately, the
FHFA will also publish a proposal for state level pricing for
public input.
But all this still begs the question, "What is a private
market g-fee?" Under the Housing and Economic Recovery
Act of 2008, the FHFA is required to conduct annual studies of
the g-fees charged by the GSEs and submit a report to
Congress. The FHFA uses loan level data from the GSEs
segmented by product type, LTV, credit score, and size of
lender for the purposes of this report. Each agency’s
proprietary costing model is then used to estimate cost due to
guarantee payments and the expected return on capital.
"Private money" does not necessarily have access to this data.
For F&F, the current and future g-fee is based on the
projected g-fee cash inflows: is fee income sufficient to
offset the cost involved in guaranteed loans, as well as the
required return on capital. Makes sense to me, although one
can only guess at the exact “private money gfee.”
Traditionally, smaller lenders pay higher g-fees due to the
perceived higher cost of doing business with them. MBS hedging
costs borne by the GSEs (as smaller lenders are more likely to
deliver to the cash window), liquidity disadvantages, higher
effect of fixed administrative costs, and higher counterparty
risks are included in those costs. And historically larger
lenders are also usually able to negotiate down their g-fees:
U.S. Bank does not have the same g-fee as Rob's Home Mortgage
and Laundromat. But recent reports show that the higher fees
charged of smaller lenders are disproportionate to the higher
costs. In the future, don't be surprised if the agencies
come out with either an entirely different structure, or
take the current structure and use more loan-level price
attributes to set the g-fees to better model the risk.
Turning
to the temporal markets, Tuesday saw little change in prices
(the 10-yr was down about .125 and closed at 1.70% and agency
MBS prices were worse about 1/16 in price) on less-than
average volume. Chatter in the press focused on the 3-yr
auction (just fine), today’s $21 billion 10-yr auction, and
miscellaneous news from Europe. Today begins one of the
periodic Federal Open Market Committee meetings (“ok…who took
the last jelly glazed…Ben wanted it!”) and the market seems to
be positioning for QE3 information from the Fed later this
week: mortgage pricing is doing better than Treasury pricing.
In
the early going, unfortunately, rates have edged higher: the
10-yr has crept up to 1.74% and MBS prices are worse by
.125-.250.
An American tourist in London decides to skip his tour group
and explore the city on his own.
He wanders around, seeing the sights, and occasionally
stopping at a quaint pub to soak up the local culture, chat
with the lads, and have a pint of the Local Favorite.
After a while, he finds himself in a very high class
neighborhood - big, stately residences - no pubs, no stores,
no restaurants, and worst of all... NO PUBLIC RESTROOMS.
He really, really has to go, after all those Brews.
He finds a narrow side street, with high walls surrounding the
adjacent buildings and decides to use the wall to solve his
problem.
As he is unzipping, he is tapped on the shoulder by a London
Bobbie, who says, "Sir, you simply cannot do that here, you
know."
"I'm very sorry, officer," replies the American, "but I
really, really HAVE TO GO, and I just can't find a public
restroom."
"Ah, yes," said the Bobbie "Just follow me." He leads him to a
back "delivery alley," then along a wall to a gate, which he
opens. "In there," points the Bobbie. "Whiz away... anywhere
you want."
The fellow enters and finds himself in the most beautiful
garden he has ever seen.
Manicured grass lawns, statuary, fountains, sculptured hedges,
and huge beds of gorgeous flowers, all in perfect bloom.
Since he has the cop's blessing, he zips down and unburdens
himself and is greatly relieved.
As he goes back thru the gate, he says to the Bobbie, "That
was really decent of you - is that "English Hospitality?"
"No," replied the Bobbie, with a satisfied smile on his face,
"that is the German Embassy."
If
you're interested, visit my twice-a-month blog at the STRATMOR
Group web site located at www.stratmorgroup.com.
The current blog discusses the new CFPB Rule combining TILA
& RESPA disclosures. If you have both the time and
inclination, make a comment on what I have written, or on
other comments so that folks can learn what's going on out
there from the other readers.
