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MBA Urges FHFA To Delay Changes To Enterprise Regulatory Capital Framework

David Krechevsky
May 15, 2023
Photo credit: Getty Images/Bet_Noire

Seeks additional analysis for some portions of proposed changes.

The Mortgage Bankers Association on Friday urged the Federal Housing Finance Agency to delay implementing proposed changes to the Enterprise Regulatory Capital Framework (ERCF).

The request was included in a letter to FHFA Director Sandra L. Thompson sent in response to the agency’s request for comment on a Notice of Proposed Rule Making that would amend portions of the ERCF for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

The proposed rule includes modifications of certain provisions of the ERCF related to guarantees on commingled securities; multifamily mortgage exposures secured by properties with government subsidies; derivatives and cleared transactions; and credit scores.

The five-page letter, signed by MBA President and CEO Robert D. Broeksmit, begins by stating that the ERCF “is critical to ensuring the Enterprises can operate in a safe and sound manner.” It adds that “MBA is generally supportive of most of the amendments in the proposal,” but raises questions about some of them.

Commingled Securities

On the guarantees for commingled securities, MBA states it “continues to oppose strongly” any risk-weighting of re-securitizations issued by one of the GSEs that contain securities issued by the other GSE. 

“MBA supports the changes in the proposal that would reduce the risk weight and credit conversion factor for commingled securities form 20% and 100% to 5% and 50%, respectively," the letter states. “The existing 20% risk weighting resulted in the implementation of a 50-basis-point commingling fee last year."

It continues, "MBA expressed concern that the fee would generate significant frictions in the Uniform Mortgage Backed Securities (UMBS) market and impair the fungibility of Fannie Mae- and Freddie Mac-issued collateral that underpins the design of the UMBS. Ultimately, this could reduce market liquidity, which ultimately hurts borrowers.”

MBA states the ERCF should not include any provisions that could deter the GSEs from engaging in re-securitizations of UMBS, or from treating UMBS issued by another GSE as less than fully fungible with its own UMBS. 

“We encourage FHFA to continue to monitor UMBS performance to ensure they remain fungible and make future adjustments to the ERCF as needed,” the letter states.

Credit Scores

The letter also raises concerns about representative credit scores. Specifically, it encourages FHFA to “delay implementation and further analyze the potential impacts of the proposed changes for all market participants, particularly if the capital framework changes will be implemented before the transition to a bi-merge credit report requirement as outlined in the proposal.”

Under the bi-merge credit requirement, the proposed amendment would modify the existing procedure for selecting representative credit scores for borrowers. FHFA recently announced that Fannie Mae and Freddie Mac would switch to the bi-merge credit report, a process that allows them to use the average of two credit scores instead of the median of three scores or the lowest of two scores.

In its letter, the MBA states that, “While the proposed changes are intended to account for an expected drop in scores, there are concerns that implementing this change ahead of the transition to the bi-merge requirement could artificially raise scores for some borrowers.” It then recommends that FHFA delay implementing the change and perform additional analysis, and then report any findings “as part of the new credit score implementation process.”

MBA also encourages FHFA to evaluate and reconsider two additional portions of the ERCF that are not included in the proposal, but which it believes to be critically important. These include requirements related to third-party-originated (TPO)  loans and the inclusion of a multifamily countercyclical adjustment. 

“MBA would be remiss in not taking the opportunity to reiterate these positions while FHFA is considering amendments to the ERCF,” the letter states.

TPO Pricing

First, MBA said it remains concerned about “variations in GSE pricing for loans with substantially similar credit characteristics based on origination channel” and specifically cites pricing penalties imposed on TPO loans.

The letter states that “at least one of the GSEs” — which it does not identify — is providing “worse execution/pricing on TPO loans relative to retail loans solely due to this difference in origination channel, and the disparity in pricing stems from the higher risk multiplier for those loans in the ERCF.”.

“The reported disparities in pricing for TPO loans are a dramatic departure from the core level-playing field principle FHFA has established and that MBA strongly supports,” the letter states. “These pricing variations negatively impact borrowers, particularly those that are critical to the core missions of FHFA and the GSEs,” including minority and low- to moderate-income borrowers.

“FHFA has consistently reiterated its focus on efforts to address our nation’s long-standing challenges related to housing equity — particularly with respect to the racial homeownership gap,” the letter states. “The current TPO pricing disparities run contrary to this objective and do not further efforts to increase liquidity to support historically underserved borrowers.”

The MBA then urges the FHFA to “take immediate steps to address these variations in TPO pricing, as this inappropriate risk multiplier is resulting in pricing penalties, creates an unlevel playing field among lenders, and is simultaneously harming underserved borrowers.”

It also recommends the FHFA grant the GSEs flexibility to use methods “other than pricing to manage certain risks to avoid violating the level-playing-field principle.”

Multifamily Countercyclical Adjustment

The second item outside of the ECRF amendment MBA addresses in its letter is the multifamily countercyclical adjustment. MBA states it continues to see the need to address this in the ERCF, while recognizing that “the approach used in the single-family portion of the ERCF does not directly translate to multifamily.”

It recommends that FHFA consider an approach that limits the capital impact of market declines in values and incomes “until they breach the levels associated with the stress scenarios (-35% for values and -15% for income). Such an approach would operationalize the intent of the capital framework — building capital during market growth and relying on that capital during market declines.”

The letter adds that MBA understands “such an approach will require additional time and effort to fully develop.”

The letter concludes by stating the MBA “appreciates the opportunity to provide observations and recommendations” on the proposed amendments to the ERCF, as well as additional portions of the framework.

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