FHFA must become aggressive on low balance loans

Later this month, the Federal Housing Finance Agency is expected to increase the compliant loan limit to a benchmark of $ 650,000 and to nearly $ 1 million in high-cost markets. The current compliant loan limits for single family homes are $ 548,250 and $ 822,375, respectively.

Fannie Mae and Freddie Mac are limited by law to the purchase of single-family mortgages with origination balances below a specific amount, known as the “conforming loan limit”. Loans above this amount are known as jumbo loans, which are primarily a market for large custodians. US banks hold $ 2.4 trillion in predominantly blue chip securities, up from $ 2.8 trillion in 2008.

Almost all residential loans are underwritten and documented to the conventional lending standard, regardless of their size. But smaller loans are lost in the mix, which tend to be less profitable for lenders and unwanted for investors and service providers. The market for large conventional and jumbo loans does not need the help of policymakers, but small loans that produce less income do need support.

The impending increase in the size of loans eligible for purchase by Fannie Mae and Freddie Mac illustrates how the FHFA, which increasingly focuses on expanding access to credit, is instead being forced to adjust its rising inflation policy. The Federal Open Market Committee has failed in its mission to ensure price stability in the United States, leaving the Biden administration to own the inflation problem.

Despite doubts about home price appreciation, FHFA Acting Director Sandra Thompson has placed affordability at the top of the annual to-do list for government-sponsored businesses. In his Dashboard 2022, the FHFA instructed the GSEs to update the pricing framework to “increase support for borrowers from the main mission”.

It should be noted that Thompson also called on GSEs to resume risk-sharing transactions, overturning a largely political decision to end former director Mark Calabria’s program.

“The key for businesses that fulfill their statutory mandates is their ability to advance sustainable and affordable home ownership and rental housing, and improve their financial position by transferring credit risk from the taxpayer,” said Thompson last week.

GSEs should work to increase the availability of low-balance mortgages, the scorecard said, and make recommendations to facilitate greater supply of affordable housing. The FHFA also said GSEs should complete validation and approval of credit score models and implement these changes.

Talking about affordability is fine, but sadly GSEs will spend much of 2022 buying fewer and larger mortgages, at a higher cost, and based on established credit score models. Even though the FHFA tries to coax conventional issuers into focusing on smaller, less profitable mortgages, the industry is actually focusing in a whole different direction.

The limits on loan repurchases by GSEs for housing not occupied by their owner, for example, are areas where traditional issuers hope for an evolution. Some issuers claim that allowing GSEs to re-purchase NOO loans would hurt the non-QM market. In the meantime, the private “non-QM” market for jumbo residential loans and other types of financing for residential properties remains fairly strong.

“I think the low interest rate environment and high production volumes mean that non-QM has not been a priority for the initiators. As rates start to rise and we have excess capacity in the system as the mortgage market shrinks, we expect to see a lot more non-quality management activity, ”an executive said. bank to NMN.

“With the recent rule change, a lot of our historic non-quality management purchases now flow into our other programs,” notes Chris Abate, CEO of Redwood Trust. “Having said that, we believe the non-QM market continues to grow significantly.”

“Much of the recent non-QM origination is for alternative documentation type loans, some of which is underwritten on the basis of bank statements or P&L reviewed by the CPA,” Abate continues. “The execution of the securitization has been favorable and lending rates have evolved as a sign of sympathy. Considering the types of non-QMs currently produced, we don’t see much of a link with GSE loan limits as the related guidelines overlap very little.

One area where the FHFA can significantly support small loans is by easing restrictions on GSEs for purchasing and insuring seasoned loans from community banks and credit unions, two of the main channels. providing small loans to low-income communities.

“We are not reviewing bulk purchase transactions at this time,” said the notice on the Fannie Mae website. “Fannie Mae continues to provide liquidity to markets for senior loans of less than 6 months on a flow basis. “

Under Mark Calabria, the FHFA closed the “structured offices” of the two GSEs, thus closing an important avenue for small custodians to liquefy their portfolios. These are performing, well underwritten and seasoned loans of 1 to 4 family properties held in the retained portfolio of Federal Insured Custodians. Yet for some strange reason, the Biden administration has yet to reverse this unfortunate move.

Non-banks usually make larger loans and sell them immediately because they lack the capital to accumulate assets and also seek to avoid interest rate risk. Banks and credit unions, however, want to keep loans in their portfolios, depending on whether or not there is a demand for new loans that may exceed the bank’s capital and liquidity.

If there is a need for credit, however, small custodians often have little capacity to increase loans by selling reasonably priced loans. Without an alternative source of liquidity provided by GSEs, small banks and credit unions are at the mercy of larger nonbank depositories and aggregators.

The GSE charter requirements set out by Congress include providing “liquidity” to the secondary market, but this path is currently blocked. If the FHFA is serious about seeing more small loans made to low-income households, community banks and credit unions are the best intermediaries. Both in terms of originating loans and dealing with credit problems that may arise, Main Street loans are the answer.

Smaller loans that can be a lead product for a larger nonbank issuer or central monetary bank make good economics for smaller lenders, who are less sensitive to yield, have deposits to fund the asset, and find loan retention and service attractive. Additionally, by facilitating structured transactions for small depositories, GSEs can provide liquidity to alleviate the balance sheet problems faced by community banks and credit unions.

For example, if the small bank has loaned most of its allocation for 1-4 family loans, but has a demand for new credit in the community, it can sell some assets in a conventional MBS and thus build capacity. Here we are talking about qualifying and insuring loans for sale to investors in MBS, not keeping them in the portfolio of GSEs.

By restoring this important source of cash for small lenders, the FHFA can make new scorecard goals a reality. The FHFA should consider allowing small depositories, those defined by regulators as having total assets of less than $ 10 billion, to once again resort to structured transactions for productive and seasoned loans.

It’s ironic that one of the last remaining legacies of the director of Calabria who remains in place also happens to be the only change available to the FHFA that can help address affordability in an age of inflation. FHFA director Thompson is expected to use her knowledge of the banking world to make this change a priority ahead of the new year.

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