Fannie Mae & Freddie Mac: Steady As She Goes?

With new leadership and Congress looking for new revenue, what changes are likely at the GSEs?

A Mortgage Banker on a ship looks to the horizon for changes in the market.

Insider

Contributing Writer

Trillions of dollars of residential home loans are originated each year in the United States. And given that the majority of these loans are processed, underwritten, funded using Agency guidelines, and sold primarily to Freddie Mac and Fannie Mae, it is understandable that the industry watches their every move with great interest. As we head through autumn, let’s take a look at the shifts that these Agencies (Freddie and Fannie, aka Government Sponsored Enterprises, or GSEs), overseen by the Federal Home Finance Association (FHFA), have undergone recently to determine what lies ahead.

First, with the exit of Mark Calabria earlier this year from the helm of the FHFA, talk of removing Freddie and Fannie from conservatorship has virtually ceased. Both entities continue to be profitable, with revenue from their fee income and secondary market activities outpacing their losses and expenses. During the Trump Administration, and into the first months of 2021, the FHFA made changes to scale down the footprint of Fannie Mae and Freddie Mac and shift volume to “private label” investors.

But with Acting Director Sandra Thompson, the narrative has changed. FHFA rescinded Freddie Mac and Fannie Mae’s controversial 50-basis point adverse market refinance fee and is well aware of the industry’s goal of eliminating the 7 percent cap on GSE purchases of mortgages for investment properties (non-owner occupied) and second homes. There has also been talk of reviewing or revising the Preferred Stock Purchase Agreement (PSPA) with the U.S. Treasury.

Certainly the qualifications of the typical borrower have improved since 2007. The industry is working under the Ability to Repay (ATR) guidelines set for by the Dodd Frank Act. The quality of the borrower is much higher now than leading up to the financial crisis. Average LTVs are lower, borrowers have higher credit scores, more complete documentation is required for assets, income, and liabilities. Investors are still very interested in mortgage-backed securities underwritten and processed using Agency guidelines.

Wish Lists

Where do insiders think Freddie and Fannie are heading in terms of guidelines, policies, and market share? First, it is hoped that the GSEs, and the FHFA, realize that the minimum amount of time needed for any “negative” changes is 90 days, if not 120. A 120-day lead time on changes, meaning they could be assimilated into market without any pipeline losses, would be a healthy operating procedure even if a lender was against the actual policy. For positive changes, such as a fee reduction, 45 days is adequate.

The elimination of risk overlays on high DTIs, low LTVs, and first-time homebuyers would be on the wish list for MLOs. Any veteran originator, however, will say that they don’t want to return to the stated income or stated asset days of 2006. The Biden Administration has made it clear that affordable housing and first-time homebuyers are a priority. We could easily see a focus by Freddie and Fannie on riskier programs that center on this priorities, and we should see some work on products for high density living.

All of this is good news for anyone who makes their living in residential lending. But there are a couple clouds on the horizon. First, despite the presidential administration desiring affordable housing, translating that into state, local, county, and town priorities will be an uphill battle. Building permit costs are high, zoning ordinances can be onerous, few residents in any given area are excited about a collection of affordable housing units being built nearby, and the cost of labor and building supplies drive up costs.

There may not be much hope on for changes to second home and non-owner-occupied caps because that has not been a demographic Democrats have historically looked to protect. In other words, in a world of finite resources, and the GSEs’ charters, helping those who want to finance a 2nd home or a rental takes a back seat to helping first-time buyers and promoting general home ownership goals.

Higher Fees Probability

The high G-fees and other loan-level price adjustments that we have seen during prior Democratic administrations, and payroll tax increases, may come back to satisfy the more liberal component in Congress. Freddie and Fannie have proved a source of funds for non-lending purposes in the past. Think back to 2011/2012 when Congress and the Obama Administration turned to Fannie Mae and Freddie Mac to pay for the proposed extension of the payroll-tax cut. The revenue source, in the form of higher G-fees, is a tax that has been passed on to mortgage borrowers ever since. And once a government has a source of revenue, well, the odds of giving that up are nil.

Lastly, lowering credit guidelines, or expanding credit in general, may increase the number of potential home buyers. We are already suffering from a lack of homes for sale in many desirable parts of the nation, for a variety of reasons: cheap credit, millions of people in their late 20s and 30s hitting home-buying age, and lack of builder activity for the last several years. Expanding the credit box will increase the number of bidders on starter homes, driving up prices even more. “Unintended consequences” is not something we need again in lending.

Fortunately for lenders and investors across the nation and around the world, “stable” appears to be the description for Freddie and Fannie’s direction. Markets don’t enjoy surprises, instead preferring a steady course and predictable changes and activities. Private securitization markets appear to be healthy, as indicated by the demand for jumbo and non-QM production. And at this point the GSEs are not “broken” and not in need for any sweeping changes. And so “steady as she goes” may be the best course of action in the foreseeable future.