Adverse Market Refinancing Charges on Mortgages Are Unjustified

Fannie Mae and Freddie mac released their third-quarter results last week, reflecting combined net income of $ 6.7 billion, up significantly from the previous quarter. This strong performance was not unexpected, but makes the To come up An unfavorable 50 basis point refinancing fee in the market is more confusing.

In their earnings Release Q3 2020 10-Q, Fannie Mae says, “We are implementing new unfavorable market refinancing fees in light of the increased costs and risks we expect to incur as a result of the COVID-19 pandemic. “

Seriously? Fannie has achieved a consolidated net profit of $ 7.2 billion since the start of the year with an impressive fourth quarter ahead. And while they are certainly essential in providing huge liquidity to the country’s housing system, the results would never be what they were if it weren’t for two things.

First, Federal Reserve The stocks have burdened taxpayers with debt that now exceeds total GDP, pushing mortgage rates to historically low levels. Second, the MBS agency is one of two AAA rated instruments in housing on this earth, along with GNMA MBS, and attracts investors from all over the world. This note has nothing to do with the skills of GSEs, it comes from the government guarantee supporting these companies.

In other words, for the GSEs, this success was unavoidable. The government’s response to the COVID pandemic has lowered rates, boosting consumer demand, and GSEs now have the option of executing through any private equity option due to their exclusivity of the guarantee.


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So the question is, why are they racking up their profits with new adverse market refinancing fees of 50 basis points? Keep in mind that over half of their collateral book this quarter was on rate and term refinances. Add in withdrawal loans and the total refinancing portfolio is about two-thirds of the total new production.

The implications for unfavorable market charges from December 1 are clear, as stated in Fannie’s own 10-Q: “While refinances continue to represent a large portion of our acquisitions in 2021, we expect our Average warranty fees charged on new single-family homes conventional acquisitions will increase in 2021 due to new unfavorable market refinancing fees that we plan to implement on December 1, 2020. ”And they add,“ For every billion dollars in Qualifying refinancing loans that we acquire, we will receive $ 5 million in adverse market refinancing fees, which will be amortized into net interest income over the contractual life of the loans as a cost base adjustment.

So, is this justified? After all, they say this was implemented in light of the increased costs and risks given the implications of COVID. This is where I dispute the point. In fact, I would say it was done just because FHFA Director Mark Calabria saw an opportunity to build capital more quickly to achieve his stated goal of freeing the two companies from custody. They are, in essence, arbitrating the work of other federal agencies to stem the impact of COVID on the economy and use it to slash profits rather than support the housing sector.

So are there more risks in refis? The answer is no. The New York Federal Reserve reviewed the refinanced GSE loans on default risk and published a detailed analysis of post-HARP refinancing borrower performance to determine the net impacts on risk resulting from the refinancing of millions of Americans at lower rates after the Great Recession. Their conclusion, after a long factual analysis, was simple, “We find that reducing monthly mortgage payments through refinancing significantly decreases the likelihood of default – on mortgages as well as on other debts -“.

What helps reduce the risk for ESGs this time around? Refinancing a borrower during COVID resets the qualifying test. In other words, GSEs can see up-to-date data on income, FICOs, and assets, thereby ensuring that this group of borrowers are survivors of the COVID downgrade in the economy. In short, they get the best credit quality borrowers in the mortgage market with new confirmed credit data.

Plus, whether through an AVM and PIW (Property Inspection Waiver) or a full appraisal, they benefit from the new LTV reset, which reduces the rate. severity expected in the event of a fault, and even less the expected fault.

The New York Fed study showed that it didn’t take much to cut payments to improve default risk. GSEs generate billions of volumes in new MBS which are the best credit quality borrowers in times of pandemic. They have re-evaluated their book and continue to do so.

For Fannie and Freddie, this free ride on the back of a Fed-led rate rally is about integrity. I now understand why so many people are asking for a utility-like governance structure for these two companies. This unnecessary profit taking on the backs of homeowners at a time when lawmakers and other regulators are doing all they can to put so many dollars in the hands of consumers to avoid an even worse outcome is something that should alarm Americans.

And for the reader, don’t just take the New York Fed study for granted. Watch these statements from Fannie Mae’s Q3 10-Q:

  1. “Income (charges) related to credit. Increases in mortgage interest rates tend to lengthen the expected life of our loans, which generally increases the impairment and allowance for expected credit losses on these loans. Decreases in mortgage interest rates tend to shorten the expected life of our loans, reducing the impairment and allowance for credit losses on these loans.
  2. “Home price growth in the third quarter of 2020 has been exceptionally strong despite the COVID-19 pandemic, benefiting from continued low interest rates, low levels of supply and high levels of demand, particularly from the share first-time buyers. We currently expect home prices nationwide to rise 7.0% in 2020, compared to home price growth of 4.8% in 2019. ”
  3. “Benefit from lower actual and projected interest rates. For much of 2020, we continued to be in a historically low interest rate environment. As mortgage interest rates decline, we anticipate an increase in future prepayments on single-family loans … which decreases the expected depreciation associated with the term and interest rate concessions made on these loans and results in a benefit for credit losses.

Ultimately, they attribute their book’s performance to three things: lower rates, strong home price appreciation, and the reclassification of some loans from HFI to HFS.

The bottom line? The FHFA, in its relentless efforts to liberate GSEs, is using a global pandemic and subsequent federal response to snub its role here again. Instead of helping to ease every possible dollar into the consumer’s hands, they froth massive additional income starting Dec. 1 into their coffers from the refinancing business, the least risky part of their book. I’m not saying it’s less risky, it’s just taking them at their word.

GSEs are essential tools for the US housing system. But these actions should make everyone ask the big question: will the housing finance system really be better off by turning these companies into private mega-companies whose performance targets go beyond the responsibility of their own charters. ? After all, if this is how they behave in a national crisis, what is the next step?

I’ll end with that. My intention is not to alienate the FHFA or the GSEs. I’m just using their data, their words, and highlighting the obvious. These adverse 50bp market refinancing fees have nothing to do with risk. These are their own ulterior motives for building up capital and being released. As the taxpayers who will ultimately be held accountable for supporting the Fed’s MBS purchases, the national debt obligations, and the collateral behind these two companies, we should demand better.

This column does not necessarily reflect the opinion of the editorial staff of HousingWire and its owners.

To contact the author of this story:
Dave Stevens at [email protected]

To contact the editor responsible for this story:
Sarah Wheeler at [email protected]

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