“The reason grandparents and grandchildren get along so well is that they have a common foe.” One doesn’t like to think about parents as a foe, any more than one would want to think of the institution overseeing Freddie Mac and Fannie Mae being a foe. But the FHFA and Director Calabria are the reason for the “Special Edition” of this Commentary. The number of letters and calls to action regarding the FHFA’s price move announced last night were too great to delay so, despite me being inherently lazy and only putting out one Commentary a day, here’s a second on a single topic. Sure, it impacts every lender doing conforming conventional production, but it will impact every borrower who is refinancing with this product. How specific lenders are handling the change is up to them, procedure-wise. Ask your capital markets staff.
The saying above is humorous, unlike the 50-basis point price change that Fannie and Freddie instituted due to “higher risk and costs” on refis, not purchases. Freddie earned $1.8 billion last quarter and Fannie earned $2.5 billion. As I noted earlier today, The MBA weighed in. Some attribute the changes to Director Calabria’s desire to recapitalize the GSEs, desire to capture some of the great margins being enjoyed by originators, to balance out some of the cash window pricing gains seen in recent weeks, or the continued shift in discouraging certain types of products, there’s nothing like a price change to increase or decrease the flow of business.
Bob Broeksmit, President & CEO of the Mortgage Bankers Association, sent, “As I think you all know, I do not traffic in hyperbole, but Director Calabria’s directive requiring Fannie Mae and Freddie Mac to impose a fifty basis point price increase on all refinances effective September 1st is a stunningly brazen confiscation, and it must not stand. It will first cost lenders hundreds of millions of dollars as the bulk of your enormous locked pipelines cannot be closed and delivered by the end of August, and it will, starting today, cost consumers billions in the midst of a pandemic when the administration claims to be working to get relief and stimulus to the struggling economy.
“It will make refinances $1400 more expensive (half a point on the average +/- $280,000 GSE loan). Since FHFA cravenly declined to issue any statement and instead directed the agencies to issue releases after business hours in mid-August during a Congressional recess (and don’t buy the ludicrous assertion that this was done at the request of the GSEs), we are left to guess at FHFA’s motives.
“The GSEs bulletins cite ‘market and economic uncertainty resulting in higher risk and costs.’ This rings hollow, at best. After a difficult first quarter, where additions to allowances for loan loss reduced Fannie and Freddie’s combined net income to about $630 million, they returned to robust profitability in the second quarter, combining for $4.3 billion in net income. Refinances, generally speaking, are less risky than purchases, and there is no increase in pricing for purchases. Let’s face it: In order for the GSEs to make a refinance loan, the borrower must be paying timely on the current loan, and since most refinances reduce the monthly payment, how can they be more risky than the current historically high guaranty fees contemplate? I have seen this move referred to as a ‘cash grab,’ which sounds apt to me.
“We were not consulted as this policy was being developed. We heard from a few of you starting on Monday that something was in the works. We inquired with FHFA on Tuesday and did not get a response. We inquired at the highest levels at Fannie Mae and Freddie Mac yesterday morning, and they were unable to discuss it, clearly having been muzzled by their conservator. Make no mistake – FHFA knew that this absurdly short implementation window would mean that lenders would bear the brunt of the cost of this on your locked pipelines, and yet they proceeded. This is our punishment for the offense of working around the clock to deliver economic relief and stimulus to millions of consumers via low rate refinances and four million forbearances.”
Bob’s note finished up with, “We have issued a blunt statement calling on FHFA to withdraw this directive, and I have given several press interviews, including to the Wall Street Journal, which quoted me: ‘For the GSEs to add a 50-basis point surcharge on refinances when the nation is struggling with the greatest economic downturn since the Great Depression is outrageous.’ We will shout from the mountaintops, ourselves and together with other organizations, reaching the media, elected representatives, and policymakers, and I urge you to do the same. Call your Senators and Representatives. This is still America, and we cannot sit still in the face of this wholly unwarranted confiscation.”
Isaac Boltansky with Compass Point Research & Trading transmitted, “The additional 50bps charge is unlikely to stop the mortgage refinancing machine given current rates, but this new charge is akin to throwing sand in the gears. Furthermore, this policy decision is perplexingly discordant given the Fed’s MBS purchases and the coordinated effort to bolster economic activity.
“In the simplest terms, this new fee is (1) negative for a struggling economy, especially given the relative strength of the housing sector; (2) while an incremental negative for volumes, unlikely to be a substantial blow to the refinance wave given the large remaining population of borrowers ‘in-the-money’ factoring in the increased cost; (3) a disappointment for both borrowers and lenders with sizable locked pipelines as delivering those loans by the end of the month will be difficult; (4) a negative for lenders, although our initial analysis suggests the magnitude may be limited with the largest hit being on the loans with currently locked rates in pipeline, as they will bear the 50 bps cost as a reduction in gain on sale; and (5) a headline positive for the effort to end the GSE conservatorships as additional fee income should prove positive for their capital positions.”
The potential impact of the pricing change on refi rates? “We highlight that the 50-basis point increase is a loan-level pricing adjustment paid upon loan delivery, and will likely be ultimately ‘paid for’ by passing on the cost through higher mortgage rates. The increase in the consumer rate will be driven by the assumptions related to the life of the loan… We estimate the ultimate increase to mortgage rate to be 6 – 12.5 bps. According to a 2015 FHFA guarantee fee review, it estimates that a 25-bps upfront fee translates to a 0.05% increase in mortgage rate (or 0.10% for a 50 bps LLPA), the high-end of our sensitivity.
“Assuming the cost ultimately gets passed through to consumers in the form of higher rates, we believe this is unlikely to be a material blow to the current refinance wave, though an incremental headwind. Factoring in the 6 to 12.5 bps above, all else equal, consumer rates would increase to 3.02% – 3.09%. Per Black Knight’s June mortgage monitor, 15.6M borrowers are ‘in-the-money’ to refinance at a 3.125% interest rate (jumps to 19.5M at a 2.875% rate). We also highlight that primary-secondary spreads remain historically wide and as capacity ‘right sizes,’ there is opportunity for rates to trend lower.
“Director Calabria is undoubtedly doing what he believes is right in his role as conservator of the GSEs, but we are perplexed by the unclear communication, the short implementation timeline, and the complete absence of a clear policy justification for this sudden action. We offer additional thoughts on each of these points. In terms of communication, the GSEs released new lender letters on a Monday afternoon in August during a Congressional recess. The FHFA released no official statement and the only public comment from the FHFA we saw suggested that the GSEs requested this fee increase.
“A number of channel checks have suggested that there will be an immediate impact on borrowers currently in locked pipelines as there is simply not sufficient time to close and deliver the loan by the end of August. Our contacts said that the pricing increase is likely manageable given rates and borrower interest in refinancing, but the short timeframe injects frustration and complexity into the process.
“It is wholly unclear to us why this decision was announced yesterday. In their releases, Fannie Mae cited ‘market and economic uncertainty resulting in higher risk and costs’ and Freddie Mac cited ‘risk management and loss forecasting precipitated’ by the pandemic. We have been living with economic and market uncertainty for the better part of the year, which begs the question: What has changed? In discussing this with contacts, some have suggested this is a result of pessimism regarding the Phase 4 package on Capitol Hill, others have suggested this relates to the effort to end the GSE conservatorships, and others suggest that this is consistent with Director Calabria’s long-held views on equity stripping. Whatever the answer may be, the timing is curious and the September effective date is troubling for market participants.
“In the coming days, Director Calabria will face fierce opposition from industry groups, a handful of forceful statements from Capitol Hill, and potentially even some headline resistance from Trump administration officials looking far and wide for means of easing economic conditions. It will take time to gauge whether the opposition to this pricing change will prove successful, but the short timeframe and the inherent malaise in Washington during August will make stopping this change difficult.” Well done Isaac!
Scott Olson sent over a note saying that the Community Home Lenders Association (CHLA) today issued the following statement calling on the GSEs to withdraw the adverse market refinance fee of .5% they announced yesterday. “The Community Home Lenders Association calls on Fannie Mae and Freddie Mac to withdraw the half point fee they announced yesterday on refinance mortgages. At a time when borrowers are utilizing refinances to strengthen their finances by taking advantage of historically low mortgage rates, now is not the time to raise mortgage rates and costs on working families. Congress, the Federal Reserve, and Treasury have been taking strong actions to support our economy; Fannie Mae and Freddie Mac should do the same – not make it tougher for families.” CHLA also pointed out that the short effective date time frame could create problems for loan locks, leaving lenders at risk for this unexpected extra cost.
Jeff Reeves with Canopy Mortgage relayed, “I am going to add my two cents to your inbox in the hope that you’ll forward this along to someone who not only has some influence on pricing but who also has a conscience.
“Speaking of conscience, the stunt that Fannie and Freddie pulled tonight is truly unconscionable. At the heart of my grievance is that this surprise announcement essentially applies retroactively. It applies to the 800+ million in refinance volume in my active pipeline: a pipeline that I originated 1-60 days ago on the assumption that my partner, Fannie Mae, would continue to act in good faith. Instead, Fannie and Freddie pulled a kind of ex post facto fast-one on me and our entire industry tonight. And for the second time in a year (the first being the agency’s sputtering, passive, vacillating response to forbearance that defied the spirit of the Cares Act) the Agencies again seem to betray the very purpose for their existence, which is to provide both liquidity and confidence to lenders.
“Fannie and Freddie exist so that companies like ours can not only confidently lend knowing that we can liquidate our finite assets but that we can confidently price our loans well in advance of the time the Agencies actually purchase them. When they betray that confidence, they weaken the fabric and reason for their existence. And when F&F betray that confidence, they ultimately betray the consumer, who – let’s not kid ourselves – ends up footing the bill in the long run. My small company will take a four million dollar hit in the short run but in the long run, the borrower will bear the brunt of this.
“This kind of action erodes confidence and eroded confidence always leads to higher margins – margins that the industry will now have to increase to protect itself from another potential blindside from the parties that supposedly exist to support them, the parties, Fannie and Freddie, that are supposed to be beacon of stability in an often chaotic market.
“Again – and I believe I speak for most in the industry – at issue here is the suddenness of the application of the new LLPA. At the end of the day, Fannie (and its stepfather, FHFA) get to decide how it prices its loans. That’s its prerogative. Most commentators are calling this a shameful cash grab by the Agencies, but I’m not that self-righteous about their pricing decisions. They should make as much money as they possibly can. But they need to do so honestly, transparently, and responsibly. And in this case, Fannie and Freddie have exhibited none of those three attributes.
“My plea is that you postpone the September 1 implementation and give your partners time to price this risk into our new originations. Make it effective November 1. Do the right thing.”
How to write to your Senator or Representative
Here you go:
I wasn’t particularly close to my brother before he died, which was lucky because he was hit by lightning.
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