Regulators continue to pressure independent mortgage banks
The big question in Washington is what will happen as the COVID crisis slowly ends and the change of government ushers in a new period of abuse of enforcement power against mortgage lenders by the Biden administration.
Vice President Kamala Harris, lest we all forget her, catapulted into large-scale politics via the 2012 national mortgage regulations. So far, the policy changes in Washington appear to be mostly symbolic, although there is evidence that the Consumer Financial Protection Bureau is gearing up for the second round of the Great Mortgage Inquisition.
Hannah Lang reports in NMN that the CFPB rescinded seven policy statements released last year under the Trump administration that gave flexibility to financial institutions in the face of the fallout from the coronavirus pandemic.
The CFPB warned in a terse press release that by abolishing the seven policy statements, the agency “gives notice of its intention to exercise the full extent of supervisory and enforcement authority under the Dodd law- Frank ”. Translated into progressive newspeak, that means, get out your checkbook.
A key indication of the future of the Department of Housing and Urban Development came last week when Secretary Marcia Fudge said: “Given the current FHA delinquency crisis and our duty to manage risk and the overall health of the fund, we have no short-term plan to change the mortgage insurance premium pricing of the Fund. FHA. We will continue to rigorously assess our strategy and work transparently with Congress. “
Fudge’s statement accompanied HUD’s quarterly report to Congress on the financial condition of the Mutual mortgage insurance fund, who noted that the seriously delinquent mortgage rate fell from 4% to 12% in the past year, while prepayment defaults fell from 1% to 6%.
Ian Katz of Capital Alpha Partners retorts, “We see a reduction come back into consideration – most likely in 2022 – assuming the delinquency numbers show improvement. Since Fudge specifically mentioned the “delinquency crisis,” it will be difficult for him to turn the tide until this crisis is clearly over. We’ll see about the timing, but it’s clear that delinquency in the government loan market is a priority in Washington.
Meanwhile at the Federal Housing Finance Authority, director Mark Calabria continues to do “by the book” in terms of enforcing the statute regarding the supervision of Fannie Mae and Freddie Mac. Contradictory rules put in place by Congress force Calabria to prepare GSEs for exit from guardianship, while taking measures to limit the risk to the taxpayer.
Neither goal will be achieved and in doing so much damage is done to this crucial sector of the economy. Perhaps the biggest change to date by Director Calabria is to limit loan purchases through the cash desk, a move that will have serious negative consequences for the mortgage market and consumers by limiting the availability of credit. .
Dozens of small non-bank issuers as well as depositories such as credit unions will likely be forced to go out of business as a result of this unnecessary change. The risks for GSEs associated with over-the-counter purchases are minimal. The winners are the biggest banks, which will gain additional monopoly power in the secondary mortgage market when it comes to loan purchases and liquidity provision.
“This is potentially a big deal, especially for non-banks and small originators who rely on the cash window for liquidity and certainty,” writes Lee Smith, president of mortgages at Flagstar Bancorp. He keeps on:
“Non-bank principals are not only operationally limited by the available capacity, but also financially by the availability of warehouse lines. They don’t have endless operating capacity or warehouse availability, so being able to convert loans to cash quickly is important.
Depriving small independent mortgage banks and custodians of a large source of liquidity may seem like a smart way to reduce risk within the boundaries of the FHFA headquarters. In fact, changes to the cash desk may actually increase systemic risk and limit the availability of credit to consumers at a critical time for the US economy.
While Calabria now migrates to the progressive left in a rhetorical fashion, its decisions so far are conservative and involve a slow death for GSEs and IMBs operating in the conventional market. Look at Calabria’s milestones so far: No liquidity support for IMBs during forbearance, a punitive 500-700bp first payment forbearance fee on COVID loans, an adverse market fee of 50 bp on refis to subsidize GSEs at consumers’ expense, an aggressive capital rule that ends GSE efforts to limit risk to taxpayers, and a ceiling of 7% on loans for residences not occupied by the owner (NOO) and secondary residences.
“If there was any doubt as to what Mark Calabria has done and has done since taking the helm of the FHA, watch his testimony from 2011Former Mortgage Bankers Association president David Stevens told NMN. “Calabria calls for reducing the role of IMBs by shifting volume to banks and crises. He calls for the elimination of NOO loans, lowering of conventional loan limits, salary caps for GSE employees and their receivership. “
It should be noted that Senator Pat Toomey (R-Pa.), Rank Member of the Senate Banking Committee, has just published his principles for GSE reform. Among them are government support, private equity, competition, taxpayer protection and the availability of the 30-year fixed rate mortgage.
But none of these talking points from Senator Toomey are really relevant to the mortgage market of 2021, where banks are shying away from 1-4s and GSEs are sidelined by rules imposed by the FHFA. As banks pull out of the market, IMBs now create and manage two-thirds of all residential mortgages for one to four families.
As this writer noted in a recent blog post, banks saw a huge $ 400 billion net decline in third party serviced assets and portfolio in 2020 due to loan prepayments. The banks have not replaced these loans. In the meantime, IMBs have gained $ 2 trillion in market share since the end of 2018.
More competitive IMBs captured trillions of dollars in loan refinancing events in 2020, resulting in a steep drop to just $ 3 trillion in ASFO and just $ 2 trillion in one-to-one loans. four families held by portfolio banks.
Commercial banks continue to reduce their commitment to residential housing due to the Dodd-Frank, Basel III and state regulatory abuses. When Director Calabria argues for a diminished role for GSEs in the residential credit market, one wonders if he, Senator Toomey and the Biden administration are aware of these important trends.
We should all be asking ourselves what the housing market will look like if Director Calabria remains in office until 2021 and continues to reduce the GSE footprint. Unless Congress and the Biden administration recognize that the real issue in housing reform is to maintain a competitive alternative to the bigger banks, we doubt the mortgage industry will be relieved of negative developments in Washington.