July 2: CFPB, Fair Credit, and UDAAP; Ginnie and Fannie in the capital markets; OCC’s mortgage snapshot

Occasionally someone will mention, as was talk in 2008-2010, of a foreclosure “tidal wave” or upcoming default escalation. If something goes from 1 percent to 2 percent, yes, it is a 100 percent increase. But the numbers are historically good. My two cents… Originators know that residential borrowers in the last several years have solid credit, their home loans are well underwritten, and, thanks to a couple years of double-digit appreciation in most areas, have a lot of equity in their homes. Sure enough, this week the OCC released its quarterly mortgage metrics report addressing performance data for the first quarter of 2022 for loans that reporting banks own, or service for others as a fee-based business. The first-lien mortgages included in the OCC’s quarterly report comprise 22 percent of all residential mortgage debt outstanding in the U.S., or approximately 12.2 million loans totaling $2.6 trillion in principal balances. The performance of first-lien mortgages in the federal banking system improved during the first quarter of 2022: 96.9 percent of mortgages were current and performing at the end of the quarter. The percentage of seriously delinquent mortgages was 1.8 percent in the first quarter of 2022, compared to 2.3 percent in the prior quarter. However, foreclosures increased compared to the prior quarter and a year earlier as pandemic-related accommodations wound down, with servicers initiating 19,524 new foreclosures in the first quarter of 2022.

Saturday Spotlight: (Nothing this week due to the holiday. For more information on having your firm’s extracurricular activities, employee growth, and your charitable side featured, contact Chrisman LLC’s Anjelica Nixt.)

CFPB: always moving

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The Consumer Finance Protection Bureau (CFPB for anyone who didn’t know) issued an interpretive rule on the scope of the Fair Credit Reporting Act’s preemption provisions. The rule’s narrow reading of those provisions appears intended to encourage and support state legislative efforts to enact laws targeting credit reporting issues of concern to the CFPB, such as the reporting of medical debt. Ballard Spahr weighed in. And thus the CFPB affirms states’ abilities to protect their residents with limited preemption by implementing their own fair credit reporting laws that are stricter than the federal Fair Credit Reporting Act (FCRA).

On June 29, the American University Washington College of Law held a symposium centered in part around the CFPB’s new approach for examining institutions for unfair conduct. During the CFPB’s New Approach to Discrimination: Invoking UDAAP symposium, CFPB Assistant Director for the Office of Enforcement Eric Halperin answered questions related to updates recently made to the CFPB’s Unfair, Deceptive, or Abusive Acts or Practices Examination Manual. These updates detail the agency’s view that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service as an unfair act or practice. Buckley LLC reminds us that in March the CFPB, “Published a separate blog post by its enforcement and supervision heads explaining that they were ‘cracking down on discrimination in the financial sector,’ and that the new procedures would guide examiners to look ‘beyond discrimination directly connected to fair lending laws’ and ‘to review any policies or practices that exclude individuals from products and services, or offer products or services with different terms, in an unfairly discriminatory manner.’”

Buckley LLC’s post went on, reminding readers of the June 28 letter that trade associations sent to the CFPB urging recission of revisions to the Examination Manual. “Halperin stated that the CFPB’s Examination Manual updates provide guidance on how examiners will implement the Bureau’s statutory authority to examine whether an act or practice is unfair because it may cause or is likely to cause substantial injury to consumers that is not reasonably avoidable and not outweighed by countervailing benefits to consumers or competition. He stressed that the update does not create a new legal standard under the three prongs of the unfairness standard.

“Halperin also discussed how the Bureau’s UDAAP authority interacts with laws enacted specifically to prevent discriminatory conduct such as ECOA and the Fair Housing Act, and touched on steps institutions should consider taking to ensure compliance. Notably, when asked whether the Bureau intends to pursue disparate impact claims under the CFPA, Halperin stated that disparate impact, along with disparate treatment, are wholly distinct concepts from Dodd-Frank’s prohibition on unfair acts and practices. He added that in assessing an unfair act and practice, the key is to examine the substantial injury prong and then assess the reasonable avoidability and the countervailing benefits prongs.

“He further explained that the unfairness test does not contain an intentional standard and noted that there have been cases brought by both the FTC and the Bureau where there was injurious conduct that was not intentional or specifically known to the party engaging in this practice. According to Halperin, substantial injury alone is not sufficient to prove unfairness and using disparate impact as the mechanism of proof is not what the Bureau uses to prove an unfairness claim.”

Buckley LLC’s post went on. “Halperin reiterated that the CFPB Examination Manual is designed to provide transparency to financial institutions about the types of issues that examiners will be inquiring about in furtherance of determining whether there has been an unfair act or practice under the current framework, and does not extend or create new law. In terms of practical compliance implications, Halperin said most financial institutions should already have robust UDAAP compliance systems in place and should already be looking for potential unfair acts or practices and examining patterns and group characteristics to identify the root cause of any issues, and to avoid substantial injury to consumers.”

Secondary market news

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Rates have moved higher for much of 2022, but recently have come back down. As the “push-pull” of inflation versus recession continues, we’ll see rate movement. Bond yields have been particularly volatile of late as markets struggle to understand the simultaneous impacts of inflation, which is being driven by the Russian invasion of Ukraine, supply-chain issues and rising inflation expectations, which collectively push yields up, and the increasing likelihood of a recession, due to recent outsized Fed rate hikes and expectations of more, a yield curve nearing inversion, and falling equities, which drive rates down. The financial press doesn’t have much else to talk about besides the odds, and magnitude, of a possible recession. If the recession is mild and brief (in terms of unemployment and financial markets), housing could actually benefit in the end since demand could be buoyed by falling mortgage rates and a housing recovery would come sooner rather than later and likely ahead of some other sectors in the economy.

Meanwhile, the capital markets for Agency (primarily Freddie and Fannie) loans continues to move ahead. The demand for this production in the secondary markets, along with the value of servicing, continues to drive the rates that borrowers see on rate sheets. Put another way, what happens in the secondary markets drives the rates that borrowers see in the primary markets. Poor adjustable-rate pricing for your borrowers can be attributed to a lack of liquidity in the secondary markets for ARMs. The same thing happens with fixed-rate securities. Let’s take a sample of what Ginnie and Fannie are doing out there, and save the very active Freddie for another day

Ginnie Mae, which handles where most FHA & VA loans go, guaranteed nearly $52 billion in mortgage-backed securities (MBS) in April 2022, supporting affordable homeownership and rental units for more than 186,500 households during the month. “April issuance added $19 billion to the overall portfolio this month, the strongest growth we have seen in quite some time,” said Ginnie Mae President Alanna McCargo. “Despite the rapidly changing housing market dynamics, we are also on pace to cross the $2.2 trillion threshold in May. Total new mortgage origination volume is expected to slow due to rising mortgage rates and home affordability challenges, yet we see a strong MBS issuance volume of more than $50 billion that continues to help ensure support for first-time homebuyers and those seeking affordable rental housing during this cycle.” Ginnie Mae is seeing continued strength in purchase market activity at insuring agencies driven by the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) lending, and a decrease in rate term refinance activity, given the rapid increases to mortgage rates over the period. As of April 30, Ginnie Mae’s total outstanding principal balance was $2.199 trillion, an increase from $2.182 trillion in March 2022 and $2.105 trillion in April 2021.

Fannie Mae announced the winning bidder for its nineteenth Community Impact Pool (CIP) of non-performing loans. The transaction is expected to close on August 19, 2022, and includes approximately 120 loans totaling $36.2 million in unpaid principal balance (UPB). The loans are geographically focused in the New York area, and the winning bidder was The State of New York Mortgage Agency Community Restoration Fund. The CIP awarded in this most recent transaction includes 120 loans with an aggregate UPB of $36,169,476; average loan size of $301,412; weighted average note rate of 5.24%; and weighted average broker’s price opinion (BPO) loan-to-value ratio of 43.55%. The cover bid, which was the second highest bid, for the CIP was 80.59% of UPB (27.56% of BPO). Interested bidders can register for ongoing announcements, training, and other information here. Fannie Mae will also post information about specific pools available for purchase on that page.

Fannie Mae priced Connecticut Avenue Securities (CAS) Series 2022-R07, an approximately $866 million note offering that represents Fannie Mae’s seventh CAS REMIC transaction of the year. CAS is Fannie Mae’s benchmark issuance program designed to share credit risk on its single-family conventional guaranty book of business. The reference pool for CAS Series 2022-R07 consists of approximately 101,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $30.6 billion. The reference pool includes collateral with loan-to-value ratios of 60.01 percent to 80.00 percent, which were acquired between July 2021 and August 2021. The loans included in this transaction are fixed-rate, generally 30-year term, fully amortizing mortgages and were underwritten using rigorous credit standards and enhanced risk controls. With the completion of this transaction, Fannie Mae will have brought 51 CAS deals to market, issued nearly $58 billion in notes, and transferred a portion of the credit risk to private investors on over $1.9 trillion in single-family mortgage loans, measured at the time of the transaction. To promote transparency and to help credit investors evaluate the securities and the CAS program, Fannie Mae provides ongoing, robust disclosure data, as well as access to news, resources, and analytics through its credit risk transfer webpages.

Late in the year Fannie Mae announced that it has completed its first Credit Insurance Risk Transfer (CIRT 2021-1) transaction of 2021. CIRT 2021-1 covers $31.7 billion in unpaid principal balance (UPB) of generally 30-year original term, fixed-rate loans acquired from January through March 2021. The deal transferred nearly $1 billion of mortgage credit risk. Fannie Mae will retain risk for the first 60 basis points of loss on a $31.7 billion pool of single-family loans with loan-to-value ratios greater than 80 percent and less than or equal to 97 percent. If the $190 million retention layer is exhausted, 20 insurers and reinsurers will cover the next 315 basis points of loss on the pool, up to a maximum coverage of approximately $998 million. Since inception, Fannie Mae has acquired approximately $13.9 billion of insurance coverage on $506 billion of single-family loans through the CIRT program, measured at the time of issuance for both post-acquisition (bulk) and front-end transactions. Fannie Mae provides ongoing, robust disclosure data, as well as access to news, resources, and analytics through its credit risk transfer webpages.

Fannie Mae priced a $1.07 billion Multifamily DUS REMIC (FNA 2021-M4) under its Fannie Mae Guaranteed Multifamily Structures (Fannie Mae GeMS), marking the third Fannie Mae GeMS issuance of 2021. The M4 is backed by call-protected DUS 10-year fixed-rate collateral and offered investors a tight window, low premium investment opportunity. All classes of FNA 2021-M4 are guaranteed by Fannie Mae with respect to the full and timely payment of interest and principal. The structure details for the multi-tranche offering are as follows. Class A1 has $110.358 million of original face, a weighted average life of 6.52 years, a fixed 0.959 percent coupon, a spread of S+14 bps and an offered price at even par. Class A2 has $855.979 million of original face, a weighted average life of 9.87 years, a WAC 1.466 percent coupon, a spread of S+20-bps and a 100.77 offered price. The collateral has a 1.8x weighted average debt service coverage ratio and a 64 percent weighted average LTV.

Fannie Mae announced that it has executed its second and third Credit Insurance Risk Transfer (CIRT) transactions of 2022.  As part of Fannie Mae’s ongoing effort to reduce taxpayer risk by increasing the role of private capital in the mortgage market, CIRT 2022-2 and CIRT 2022-3 together transferred $1.8 billion of mortgage credit risk to private insurers and reinsurers. Since inception to date, Fannie Mae has acquired approximately $17.6 billion of insurance coverage on $612 billion of single-family loans through the CIRT program, measured at the time of issuance for both post-acquisition (bulk) and front-end transactions. The covered loan pool for CIRT 2022-2 consists of approximately 87,400 single-family mortgage loans with an outstanding unpaid principal balance of approximately $26.5 billion. The covered pool includes collateral with loan-to-value ratios of 60.01 percent to 80.00 percent, which were acquired between April 2021 and June 2021. The covered loan pool for CIRT 2022-3 consists of approximately 76,600 single-family mortgage loans with an outstanding unpaid principal balance of approximately $23.3 billion. The covered pool includes collateral with loan-to-value ratios greater than 80 percent and less than or equal to 97 percent, which were acquired between July 2021 and September 2021. As of December 31, 2021, $750 billion in outstanding UPB of loans in our single-family conventional guaranty book of business were included in a reference pool for a credit risk transfer transaction. Fannie Mae provides ongoing, robust disclosure data, as well as access to news, resources, and analytics through its credit risk transfer webpages.

Fannie Mae marketed its twenty-fifth sale of reperforming loans as part of the company’s ongoing effort to reduce the size of its retained mortgage portfolio. The sale consists of approximately 7,600 loans, having an unpaid principal balance of approximately $1.49 billion, and is available for purchase by qualified bidders. Reperforming loans are loans that have been or are currently delinquent but have reperformed for a period of time. The terms of Fannie Mae’s reperforming loan sale require the buyer to offer loss mitigation options to any borrower who may re-default within five years following the closing of the reperforming loan sale. All purchasers are required to honor any approved or in-process loss mitigation efforts at the time of sale, including forbearance arrangements and loan modifications. In addition, purchasers must offer delinquent borrowers a waterfall of loss mitigation options, including loan modifications, which may include principal forgiveness, prior to initiating foreclosure on any loan.

A little girl, dressed in her Sunday best, was running as fast as she could, trying not to be late for Bible class.
As she ran, she prayed, “Dear Lord, please don’t let me be late! Dear Lord, please don’t let me be late!”
While she was running and praying, she tripped on a curb and fell, getting her clothes dirty and tearing her dress.
She got up, brushed herself off, and started running again!
As she ran, she once again began to pray, “Dear Lord, please don’t let me be late… But please don’t shove me either!”   

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