The cost of supporting the GSE mortgage market may be too high for lenders
WASHINGTON – Lenders have hailed the recent ad that Fannie Mae and Freddie Mac can already take out loans, but with that relief comes a catch.
The initiators are now assessing whether the plan makes sense to them after learning that Fannie and Freddie would charge a fee for taking more risks. The fee, known as the loan-level price adjustment, is 5% of the outstanding principal balance for first-time homebuyers and 7% for everyone else.
The new cost adjustment, which was developed in consultation with the FHFA, is another challenge for lenders as the government encourages forbearance for borrowers facing the coronavirus pandemic.
Normally, borrowers would be forced to pay additional fees associated with a loan. But in this case, since the forbearance loans will have already been closed, the lender is responsible for adjusting the prices to the loan level. The fees Fannie and Freddie set might be too high to offer relief to lenders.
“The FHFA is trying to have it both ways,” said Laurence Platt, partner at Mayer Brown. Supporting loans during a pandemic is a public good, he said, but Fannie and Freddie are still in a fragile state more than 11 years after the government foreclosed them during the 2008 mortgage crisis.
“On the one hand, they are trying to act in accordance with their public purpose by purchasing forbearance loans,” Platt said. “On the other hand, they try to act like an umbrella company by pricing these loans in a way that makes it unattractive. “
FHFA Director Mark Calabria made it clear how government-sponsored companies should behave while they are under trusteeship, and said he didn’t think it was their responsibility to help mortgage companies facing a liquidity crunch due to the coronavirus pandemic. .
Instead, he focuses on building the capital cushions at Fannie and Freddie, which pale in comparison to financial firms of similar size. Currently, companies are allowed to hold a combined capital of $ 45 billion and can access a line of credit with the Department of the Treasury if their own capital is depleted.
Buying loans with forbearance could very well result in losses for Fannie and Freddie, which is probably why the GSEs are imposing a high price adjustment on loans.
“It’s certainly related to the increased level of risk they take in purchasing these loans, and that’s why their charter doesn’t allow it in the first place,” said David Merkur, lawyer in the Services Practice Group. of Greenspoon Marder.
“There is an increased level of risk for them that these loans will maintain either delinquent status or a trend toward delinquent status due to forbearance,” he said.
The FHFA announced on April 22 its new policy allowing GSEs to support loans by forbearance. Fannie and Freddie described the loan price adjustments on their websites shortly thereafter.
The GSEs said the fees were priced as such to “address the risk of these temporary measures” and to protect taxpayers.
Balancing the safety and soundness of Fannie and Freddie while meeting the companies’ initial goals of expanding the secondary mortgage market is no small feat, especially in the midst of a global pandemic. Lenders of all sizes urge FHFA to focus on the latter.
“By forcing these price adjustments on the loan level, it undermines the public objective, but again, it promotes that objective of guardianship,” Platt said. “And so the question is in times of crisis, which of these two goals should prevail?”
The additional fees or charges associated with selling loans in the secondary market make it more difficult for lenders to ensure they have enough cash to continue lending during a downturn, said Ann Kossachev, Director of Regulatory Affairs at the National Association of Federally Insured Credit Unions. .
“We certainly understand that Fannie and Freddie have their own capital constraints and are facing challenges due to the pandemic just like everyone else,” she said. “But when we see policy decisions like this from regulators, it makes things a little more difficult, especially in times of economic crisis.”
While the fees attached to the forbearance loans likely reflect the FHFA’s estimate of default as well as the possibility of a struggling housing market in the future, the originator’s price for Fannie and Freddie for buying those mortgages is still “cumbersome,” analysts at JPMorgan Chase wrote in an April 24 memo.
“A 7-point LLPA charge would effectively wipe out any selling gain that originators expect on new production loans,” they said. “With the prospect of losses, we think lenders would create credit overlays to limit this outcome.”
FHFA policy allowing Fannie and Freddie to purchase forbearance loans aims to address concerns the pandemic crisis will bring sharp contraction of the mortgage market. Ahead of the agency’s announcement, lenders tightened some of their standards as they prepared to skip mortgage payments and go without GSE backing.
“If a lender can’t make money by making the loan, they won’t give a loan,” Platt said. “So at the end of the day it depends on whether the consequence of these loan price adjustments is to make origination a nonprofit.”
The Mortgage Bankers Association implored the FHFA to adjust its policy to ensure that it would not “restrict the availability of credit, noting that the agency’s pricing regime could” perpetuate … more credit terms. restrictive ”.
“Lenders have already been forced to increase costs and tighten underwriting requirements to account for situations where they cannot sell loans because borrowers are availing themselves of the forbearance options introduced by the FHFA,” MBA President and CEO Robert Broeksmit said in a statement.
Since lenders will not be able to pass on the costs of price adjustment at the loan level to borrowers, they will have to offset them elsewhere.
“This will mean that access to credit will cost borrowers more,” Kossachev said. “And for lenders to make these loans, they may have to increase the rates on all loans to make up the difference for loans that were forborne before delivery.”
The new fees could end up being prohibitive for many lenders, Merkur agreed.
“The increased percentages… [are] is going to be a significant cost that will certainly reduce the aid provided for banks, lenders and managers, ”he said.
Yet what’s important now is that there is at least a mechanism in place for lenders to be able to provide loans to Fannie and Freddie, and the details could be worked out later, Dan said. Sogorka, CEO of Sagent, a mortgage management fintech.
“The hot topic of the day is really balancing affordability and LLPAs for forborne homeowners, and that’s a risk-reward scenario,” he said. “It’s really hard to get perfect regulation, especially since the data is happening in real time.”
Meanwhile, with another mortgage payment due date approaching May 1, the industry is gearing up for another surge in forbearance requests. It remains to be seen whether lenders have the capacity to continue lending at the same time as they pay additional costs for forbidden loans.
“They might have to make tough decisions about how they would lend, which they don’t want to do now and during this tough time,” Kossachev said. “It would be great to be able to provide access to credit to as many members as possible, but it will definitely make things more difficult.”