Banc Of story: Taylor The unfinished business of Fannie and Freddie San Antonio Express News and other headlines for Banc Of California. The Federal Housing Finance Agency announced this morning that it is instructing Freddie Mac and Fannie Mae to use alternative home appraisal methods until May 17. Fannie had gone from $1.2 billion in subprime-mortgage and securities purchases in 2000 to $9.2 billion in 2001 and $15 billion in 2002. Freddie’s numbers were murkier, but clearly also on the rise. While Fannie Mae and Freddie Mac still require a traditional appraisal for the majority of their loan purchase programs, under the new rules homebuyers who make a down payment greater than 20% of the sales price and have good credit will no longer have to pay for an appraisal, which could save them more than $500 in closing costs.
If you’ve ever gone completely through the mortgage process you know full well there are rules that lenders must follow.
From federal compliance to following lending procedures, it sometimes seems a lender’s series of questions will never end.
There are definite reasons for all of this and you should certainly know that lenders would rather ask fewer questions than more. As it relates to qualifying for a mortgage, the lender must determine your loan application meets established guidelines.
The majority of home loans approved today are conventional mortgages underwritten to Fannie Mae and Freddie Mac guidelines. It’s vitally important that lenders adhere to these guidelines to keep them in business. In the mortgage industry, there is a secondary mortgage market that lenders participate in far beyond the closing of your loan. This secondary market is the buying and selling of mortgage loans, either individually or packaged up in bulk and sold.
Why do lenders buy and sell mortgage loans?
Why don’t they just keep a loan in their portfolio and collect the monthly interest?
Two basic reasons. A lender can improve its own cash flow selling a loan early and not wait to receive interest from the borrower. This is similar to selling a discounted note to collect immediate proceeds instead of waiting over a relatively long period. The second, and most important, is that selling a loan replenishes a lender’s credit line allowing the lender to make still more loans. In fact, one of the primary missions of Fannie Mae and Freddie Mac was to free up funds and creating liquidity in the secondary market. As long as a loan met the standards for Fannie Mae or Freddie Mac, the loan could easily be sold.
But Fannie Mae And Freddie Mac Aren’t Exactly The Same
Sometimes a loan underwritten to a Freddie standard might be turned down yet when approved with Fannie guidelines the loan could very well be approved.
An experienced lender who has access to both programs will know in advance which set of guidelines to use. You, the borrower, don’t necessarily need to know which guidelines best suit your situation but your lender must. All too often a mortgage company turns down a loan application when the only issue was because the loan application was underwritten under the wrong program. In most respects, if a loan application is submitted to a lender it could typically be approved under either, but in others it can’t.
Basic Differences Of Fannie Mae vs. Freddie Mac
Fannie Mae and Freddie Mac are almost identical as it relates to approval guidelines. There are loan limits for each program and loans can be used to finance a primary residence, a second home or an investment property.
There are both fixed rate and adjustable rate loan types and both require a down payment. Yet there are differences and even though the difference may appear minor at first glance that difference can mean whether or not a loan is approved. Lenders who intimately understand these guidelines won’t waste any time underwriting a loan using the wrong parameters.
Fanny San Freddy Minecraft
As it relates to rental income for example, a loan underwritten to Fannie guidelines and approved using its Automated Underwriting System, can accept rental income to help qualify even though there is no valid, signed lease agreement whereas Freddie Mac does not allow rental income to be used if there is no lease agreement nor a security deposit.
In another update, Freddie Mac only recently changed its view on landlord experience and just like Fannie no longer requires landlord experience.
Blended Ratios
Blended debt ratios are those using the occupying borrower’s income and debt along with a cosigner’s income and debt. A blended ratio simply adds everything together as if it were one borrowing entity. Fannie Mae has just recently accepted blended ratios as Freddie Mac has.
Does a condominium project need an approval?
Fannie Mae accepts a limited condo review if the automated underwriting system lists that a limited review is acceptable. A streamlined review for Freddie Mac is acceptable even though there is no message in the loan findings it is acceptable.
Is the loan funding directly into a Trust?
Fannie only requires the pertinent pages from the trust and does not require the title to be hold exclusively in the trust. Freddie Mac guidelines require all pages of the trust to be submitted and reviewed by the lender and title can then only be held by the trust, not the trustee or the borrowers.
New job in the future?
Then you probably have an employment contract. Fannie guidelines require you to begin work prior to closing on your new mortgage while with Freddie you can start to work within 90 days of closing.
Mistake on a credit report?
Freddie Mac guidelines say that a disputed account in the credit file doesn’t require any confirmation of the accuracy of the disputed account whereas Fannie Mae does. With Fannie, the disputed account must in fact be removed from the credit report and resubmitted to the automated underwriting system.
There are other differences and you might come away thinking these differences are so minor they don’t matter. But they do if any of these examples apply to your situation.
Here at Home Point, we know the differences upfront and your loan will be submitted under the proper program for a smooth loan approval process.
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Joe Biden’s victory has thrown a wrench into the Trump administration’s efforts to privatize Fannie Mae and Freddie Mac, but appointees in charge of the government-sponsored enterprises are likely to try to end the conservatorship before they exit.
While the privatization effort pushed by Federal Housing Finance Agency Chairman Mark Calabria has always been an uphill climb, Calabria and Treasury Secretary Steven Mnuchin will flex their regulatory authority in coming months. Anything they want to do to further privatization must be done before Biden takes office; the president-elect has ambitious plans for using the government to stimulate housing investment while privatization is mainly an effort to reduce the GSEs’ footprint in the market.
Fannie and Freddie have operated mostly trouble-free in recent years, which reduces the political pressure to make changes. “GSE reform is not a priority at the moment. The system is working,” said Cristian DeRitis, deputy chief economist at Moody’s Analytics. “There is little appetite to rock the boat—it goes beyond the horizon of most politicians. I see a lot of status quo on the horizon.”
That the status quo may eventually prevail doesn’t prevent change over the next 60 days, since Trump officials have shown a propensity to enact as much of their agenda as they can during the transition period. The GSEs face a slew of questions, including how long Calabria, a veteran conservative activist, will continue in his role as chief regulator. Whether the new administration can replace him before his tenure expires in 2024 is expected to be the subject of a Supreme Court ruling in the first half of 2021. Other questions involve how much Calabria and Mnuchin can accomplish in the near term, and how much control Biden’s Treasury secretary will exert for the remainder of Calabria’s term.
New Rules from FHFA
Fannie and Freddie have operated in conservatorship since being bailed out by the federal government during the global financial crisis in 2008. In exchange for the bailout funds, the GSEs were required to give all profits back to the U.S. Treasury. The Treasury also holds the option to issue $1 billion of preferred stock with a 10 percent dividend going to the Treasury, and the right to exercise stock warrants that would give the government a roughly 80 percent stake in each agency.
Conservatorship was meant to be temporary, but a series of Congresses and administrations could not agree on a permanent solution. Calabria, a former economist for Vice President Mike Pence, was appointed head of the FHFA in 2019 and began on the path of recapitalizing and releasing the agencies. He ended the cash sweep so the agencies could build up a capital base in preparation for a public offering, which he said could be as early as 2021.
Raising the amount of capital needed to make the agencies independent was never going to be easy. By various estimates it would take more than $200 billion, which would be hard under any circumstances, but the GSEs also must contend with the stock warrants owed to the Treasury. With Biden’s election, privatization appears to be a nonstarter. There’s no time to finish it before January and it can’t be done without the support of the Treasury Department.
That’s not to say that Calabria can’t or won’t exert authority during his term, however long it lasts. The Supreme Court is set to hear arguments next month on a case, Collins v. Mnuchin, that will determine (among other things) whether a president has the authority to replace an agency head without cause. If the court says the president can, Calabria would likely be quickly replaced. The case is expected to be decided by June.
Calabria imposed some critical regulatory policies impacting Fannie and Freddie this week. On Tuesday, the FHFA reduced the GSEs’ 2021 loan allocations to $70 billion, down 12.5 percent from $80 billion in 2020, and increased the proportion of loans that must have an affordable component. Affordable loans must now comprise 50 percent of lending, up from 37.5 percent in 2020, while the definition of what constitutes affordable was tightened.
On Wednesday, the FHFA issued its Final Capital Rule, which requires the GSEs to maintain tier 1 capital of 4 percent of assets. The rule amounts an increase in the amount of regulatory capital the GSEs must hold, which will serve to make them safer from losses but also increases their cost of capital. That could compel them to raise mortgage rates, increase fees, or originate loans with riskier metrics, a point made by industry trade groups to the FHFA during the comment period for the rule.
“Capital requirements appropriately tailored to institutional and systemic risk and that allow for more even competition across lenders have broad support,” the CRE Finance Council, an industry trade group, said in its comment letter. “However, unnecessarily stringent capital requirements could reduce the return on investor equity, making it that much more difficult to raise the capital needed to exit conservatorship and to ensure each enterprise’s ability to fulfill its statutory mission across the economic cycle, particularly during periods of financial stress.”
Fanny San Freddy Images
Competitive Standing Weakened
The FHFA’s actions this week may reduce Fannie’s and Freddie’s competitiveness, which would serve Calabria’s aims to increase the role of private lenders in the housing market. “Calabria has made a big deal of getting the GSEs out of conservatorship, but his actual agenda is to hobble and shrink the GSEs,” said one senior industry executive. “He doesn’t say it, but that’s what he is doing.”
Whatever Calabria’s intent, the actions taken this week are not likely to have a major effect on the multifamily lending market next year. The Mortgage Bankers Association estimates there will be $306 billion of demand for multifamily mortgages in 2021. If both GSEs use their entire allotment, that would represent more than 45 percent of the market, which is more than the goals set by the agencies. Bigger questions include the extent of capacity from other lenders and whether borrowers will be affected by the increased costs necessitated by the GSEs’ higher capital requirements.
Many lenders stopped originations in the spring and cut back on volume when they resumed, but multifamily is a favored asset class within commercial real estate. COVID-19 closures have made retail and hotel loans unpalatable and loans on office buildings are risky given the work-from-home movement. Most portfolio lenders—including banks and insurance companies—are eager to book loans on a safe asset class, while investor demand would be strong for CMBS backed by multifamily loans.
Its always sunny all episodes. How much borrowers’ costs will go up as a result of the new capital rule is not clear, but with the 10-year Treasury rate below 1.0 percent, borrowing rates are near historical lows. A small- to moderate increase in loan coupons (25 to 50 basis points) should not create a large disruption, unless Treasury rates unexpectedly shoot up. “Things could be impacted negatively in the short term, but the market will adjust,” said David Borsos, vice president of capital markets at the National Multifamily Housing Council.
Transition Issues
Although Trump appointees are unlikely to complete GSE privatization, Mnuchin could act to further the goal to conservatorship before his term ends in January. One area of potential action is the cash sweep. The agreement with Treasury enables Fannie to retain up to $25 billion of earnings and Freddie up to $20 billion. Fannie is close to its $25 billion, while Freddie is on track to reach its limit in the second half of 2021. Calabria could increase the limit of what the agencies may retain or end the cash sweep entirely to strengthen their financial position ahead of a capital raise.
Another possibility is that Mnuchin could agree to give the FHFA director unilateral authority to move the GSEs out of conservatorship, which would involve renegotiating the Preferred Stock Purchase Agreements in a way that cuts Treasury out of the decision. “There’s some possibility that they could circumvent the need for the next Treasury secretary to sign off on the exit from conservatorship,” Borsos said.
Such an agreement would not necessarily accomplish a privatization of the GSEs. A declaration is easy to achieve; factors such as capital raising and negotiating the GSEs’ mission and relationship with the federal government are much more complex steps to take. That said, it is possible Trump administration appointees will do as much as they can before they leave to further their agenda for the agencies.
“The capital rule is a big step for FHFA to move the GSEs out of conservatorship,” noted Justin Ailes, a managing director of government relations at CREFC. “Now we watch to see if the rule plays out as intended, if further changes need to be made to the GSEs’ capital, and if the stars align for the GSEs to eventually move out of conservatorship or not.”
What Will Biden Do?
Whatever Trump appointees do over the near term, the Biden administration’s plans for the GSEs is another story. Given the large number of high-profile issues that will occupy attention and political capital, reforming the GSEs is unlikely to be a priority in the next year.
A paper written this month by Don Layton, former chief executive of Freddie Mac and senior fellow at the Harvard Joint Center for Housing Studies, suggests that Biden’s administration has two choices: continue to operate under conservatorship with few changes, or take baby steps to implement a long-term plan to operate the agencies under a “utility” model.
The argument for continuing without major changes is bolstered by the fact that changes in GSE operations made after the financial crisis have been effective. The agencies are performing well, which negates the need for change. Layton said the second option would involve continuing to operate under conservatorship and eventually regulating the fees that Fannie and Freddie charge to guarantee loans in the same manner that state commissions regulate water and electricity fees.
Fanny San Freddy Costume
“The incoming Biden administration thus has two choices, and two choices only, if it wishes to be pragmatic and move forward. One alternative is to leave the companies in long-term conservatorship for several more years,” the Harvard paper contends. “Combined with installing its own person as FHFA director, this path should be expected to deliver operating improvements and housing finance policy benefits, as has been happening in conservatorship since 2012; it can even have capital build via retained earnings.
“The other alternative is to additionally move GSE reform forward by patiently taking the first steps to implement the utility model by administrative means, which will concretely put the two companies on a defined, low-risk path out of conservatorship and towards normalcy.”