GSEs and FHFA, Housing Sales, Mortgage Servicing Policy, and Credit Availability

Mark Calabria

What’s Next For The GSEs?

Newly-sworn-in Director Mark Calabria of the FHFA conducted a wide-ranging interview with the Wall Street Journal, and made clear some of his early areas of focus.

While he wants to return the GSEs to the private sector and out of conservatorship, he also made statements that – based on this WSJ story – should be carefully looked at by industry pundits.

As reported, “Mark Calabria, in his first interview since taking the helm of the Federal Housing Finance Agency, said he wants to put firms bailed out during the crisis – now profitable – on the road toward returning to private hands. This is something Washington policy makers have tried and failed to do for the past decade. With help from Congress, he hopes to eventually tear up the firms’ federal charters and put them on a level playing field with would-be competitors.”

As speculated, Calabria made clear his desire to focus on incremental actions to reduce the footprint of the GSEs, but cautioned that he was not taking action until after the plans, as directed by President Trump, are complete.

He did reference the need for a “new model” versus the current one, stating that fixing or eliminating the QM “patch” needed to be done, and stating that – at minimum – it should be applied to all loans, not just for the GSEs.

This clearly relates to his previously-stated concerns about what he sees as excess leverage being taken by borrowers in the loans offered by Fannie and Freddie. Mark called for bipartisan legislation from congress, stating that he cannot accomplish this by himself.

Other FHFA news brought the welcome of Adolfo Marzol to the agency as the Principal Deputy Director under Calabria. Mortgage Media views this as positive news, that Mark is working to surround himself with experts who have deep industry knowledge – something that Director Watt benefitted from in his selection of key individuals like Bob Ryan.

Having Adolfo on his team will bring decades of direct experience from his roles as a senior executive at a GSE, in the private sector, and as well his recent experience working in the Trump Administration under Secretary Carson.

Housing – Which Way Is Up?

This week brought news of a slowing in housing. As CNBC’s Diana Olick reported, sales of existing homes were below expectations. But her story focuses on two anomalies. First, the supply of entry-level homes is declining, and resulted in a reduction in sales. “The inventory of cheaper homes continues to drop for two reasons: builders are not focused on the sector and investors snapped up lower-end homes during the last housing crisis, turning them into rentals. About 5 million homes were added to the rental stock and very few of them were replaced in the for-sale market,” reported Olick.

But the other side of the coin is also concerning. High-end homes dropped as well, perhaps a reflection more on demand than supply. Stated Olick: “Sales of high-end homes were soaring in 2017. Million-dollar-plus sales were up nearly 31% that year. This March, sales in that price class were down 11% year over year, even though there are plenty of those homes for sale.”

What’s perhaps most troubling is the stark gap in existing inventory, as Diana Olick adds, “In fact, there is nearly a year’s worth of luxury supply available for sale now. Compare that with barely three months’ worth of low-end supply.”

The lack of accessible affordable housing is troubling particularly from the impact on rental costs to those dependent on affordable housing. And, for the first time in years, the issue of access to affordable housing has hit the campaign trail. The New York Times Emily Badger reported: “Several Democratic candidates for president are now approaching renters in a way they’ve seldom been treated before — as a voting bloc.”

Perhaps there is a reason for the focus on the campaign trail beyond just economics and social impacts from housing affordability.

“Renters heavily overlap with key Democratic constituencies, including younger adults, African-Americans and Hispanics, and urban residents,” reports Badger. And you can hear the commentary from many of the candidates. Kamala Harris has proposed a tax credit for rental. Elizabeth Warren is presenting “wonky” housing economics, but equally chiding the greater adverse impact on minorities from a lack of affordable housing. Corey Booker has touted the famed book, “Evicted”, and Bernie Sanders stated in his Fox News Town Hall, “I believe that there is something wrong in America today when you have families today paying 40%, 50%, 60% of their limited incomes to put a roof over their heads.”

While turnout amongst the renters’ bloc has been about 10% lower than non-renters, perhaps this type of campaign rhetoric will draw more out. We at Mortgage Media look forward to an election where housing becomes a core issue. Something overdue from our view.

Mortgage Servicing Policy In Focus

The team at the Urban Institute published their findings with options on Mortgage Servicing after approximately two years of meetings with the Mortgage Servicing Collaborative. In this final brief, of five, they focus on servicing compensation. This is an effort that has come into focus numerous times and often divides the industry based on their perception of the economics to their respective firms. And Urban addressed the lack of agreement succinctly stating, “some believe that the structure of servicing compensation must be changed to better align servicing costs and revenues for performing and nonperforming loans in a manner that will improve outcomes for servicers and consumers. Others believe that the present compensation model, coupled with post-crisis reforms and recommendations from the previous MSC briefs, can promote an efficient servicing market with minimal risk of disruption. Whether and what changes to the servicing compensation model might be needed is an open question.“

This report is worth the read as it highlights the issues in the debate as well as what the positions are based on. At its core, some argue that compensation is too rich and capital intensive for performing loans and yet too low during periods of high default as was seen during the Great Recession. Others argue that the compensation should stand and policy recommendations with operational standards for consistency will be enough.

One stark element in the report is the trend between bank and non-bank servicing as shown here:

The debate will continue and as we read the report, we are struck by the complexity of the alternatives. A split fee structure for performing vs. non performing loans will still leave someone holding the uncertainty risk. If the strip maintains a fixed 25bps, then someone has that contingent liability. Urban suggests several outcomes that include the GSEs retaining the risk, a separate insurance fund, and even a separate NPL utility. For others, especially many IMBs the revenue produced incrementally from the current structure has helped them incrementally grow their share of the business.

Regardless of one’s position on this subject this is an issue that we assume will be part of the work product at FHFA, with the effort to end the conservatorship, the implementation of the new UMBS, and more. We see complex decisions ahead affecting the entire scope of transacting business through the GSEs and these will be seen years from now. In the meantime, Mortgage Media will continue to report any new meaningful work on the subject.

Credit Availability

Finally, we take note this week of several items focusing on Credit. First, we heard comments from Mark Calabria with his concerns about “excess leverage” from some homebuyers. Next, we saw Housing Wire report on the FHA change in policy for Down-payment Assistance loans (DPA) with a clear effort to control some of the concerns related to things like premium pricing as opposed to actual cash DPA programs. Next, the Urban Institute released its Mortgage Credit Availability Index showing that credit availability is the highest it’s been in ten years. And finally Ed Pinto, the conservative economist from the American Enterprise Institute (AEI) published this admonishment against the 30 year fixed rate citing what he views as creating excessive credit risk to the borrower due to a combination of its low amortization rate and its higher qualifying power that pushes buyers into larger and more expensive homes.

Pinto points out the significant growth in the 30-year fixed rate loan in his first two “facts”, amongst ten in his commentary:

Fact 1: In December 2018, 30-year loans constituted 99% of all government guaranteed loans to finance a home purchase. Government agencies guaranteed 85% of home purchase loans.

Fact 2: This was not always the case. In 1953, the year before Congress authorized the FHA to insure 30-year loans on existing homes, FHA’s average loan term was 21 years and conventional loans had a term of 15 years. Even as recently as 1992, 27% of home purchase loans had a term of 15 or 20-years.

We view the perspectives of conservative think tanks important because they may more closely align with the views of some in the current administration. It is for this reason that we focus on the statements and positions of the new head of the FHFA, but also those that might be acting as trusted advisors. And while we see an attack on the 30-year fixed rate mortgage as politically naïve, given the broad support in this country for this product, it is simply one of a series of attacks on the governments role in housing that may incrementally affect the nature of mortgage finance in the future.