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 FHFA rescinded Freddie Mac and Fannie Mae’s controversial 50-basis point adverse market refinance fee and is well aware of the industry’s goal of eliminating the 7 percent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.