Tag Archives: fannie

Subprime v. Non-Prime

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The Kroll Bond Rating Agency has issued an RMBS Research report, Credit Evolution: Non-Prime Isn’t Yesterday’s Subprime. It opens,

Following the private label RMBS market’s peak in 2007 and the ensuing credit crisis, non-agency securitizations of newly originated collateral have focused almost exclusively on prime jumbo loans. This is not surprising given the poor performance of loosely underwritten residential mortgage loans that characterized certain vintages leading up to the crisis. While legacy prime, in absolute terms, performed better than Alt-A and subprime collateral, it was apparent that origination practices had a significant impact on subsequent loan performance across product types.

Many consumers were caught in the ensuing waves of defaults, which marred their borrowing records in a manner that has either barred them from accessing housing credit, or at best made it extremely challenging to obtain a home loan. Others that managed to meet their obligations have been unable to qualify for new loans in the post-crisis era due to tighter credit standards that have been influenced by regulation.

The private label securitization market has not met the needs of these consumers for a number of reasons, including, but not limited to, reputational concerns in the aftermath of the crisis, regulatory costs, investor appetite, and the time needed for borrowers to repair their credit. The tide appears to be turning quickly, however, and Kroll Bond Rating Agency (KBRA) has observed the re-emergence of more than a dozen non-prime mortgage origination programs that intend to use securitization as a funding source. Of these, KBRA is aware of at least four securitization sponsors that have accessed the PLS market across nine issuances, two of which include rated offerings.

Thus far, KBRA has observed that today’s non-prime programs are not a simple rebranding of pre-crisis subprime origination, nor do they signal a return to the documentation excesses associated with “liar loans”. While the asset class is meant to serve those with less pristine credit, and can even have characteristics reminiscent of legacy Alt-A, it is expansive, and underwriting practices have been heavily influenced by today’s consumer-focused regulatory environment and government-sponsored entity (GSE) origination guidelines. In evaluating these new non-prime programs, KBRA believes market participants should consider the following factors:

■ Loans originated under sound compliance with Ability-To-Repay (ATR) rules should outperform 2005-2007 vintage loans with similar credit parameters, including LTV and borrower FICO scores. The ATR rules have resulted in strengthened underwriting, which should bode well for originations across the MBS space. This is particularly true of non-prime loans, where differences in origination practices can have a greater influence on future loan performance.

■ Loans that fail to adhere to GSE guidelines regarding the seasoning of credit dispositions (e.g. bankruptcy, foreclosure, etc.) on a borrower’s credit history should be viewed as having increased credit risk relative to those with similar credit profiles that lack recent disposition activity. This relationship likely depends on, among other things, equity position, current FICO score, and the likelihood that any life events relating to the prior credit issue remain unresolved.

■ Alternative documentation programs need to viewed with skepticism as they relate to the ATR rules, particularly those that serve borrowers with sub-prime credit histories. Although many programs will meet technical requirements for income verification, it is also important to demonstrate good faith in determining a borrower’s ability-to-repay. Failure to do so may not only result in poor credit performance, but increased risk of assignee liability.

■ Investor programs underwritten with reliance on expected rental income and limited documentation may pose more risk relative to fully documented investor loans where the borrower’s income and debt profile are considered, all else equal. (1, footnotes omitted)

I think KBRS is documenting a positive trend: looser credit for those with less-than-prime credit is overdue. I also think that KBRS’ concerns about the development of the non-prime market should be heeded — ensuring that borrowers have the ability to repay their mortgages should be job No. 1 for originators (although it seems ridiculous that one would have to say that). We want a mortgage market that serves everyone who is capable of making their mortgage payments for the long term. These developments in the non-prime market are most welcome and a bit overdue.

Mortgages for Borderline Borrowers

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BiggerPockets.com quoted me in 7 Mortgage Qualification Tips for Borderline Borrowers. It opens,

It’s super easy to qualify for a mortgage when you have an 800 credit score, a six-figure salary, no debt, and 20% to put down. But that isn’t everyone’s story.

It’s far more difficult to be approved with a 620 credit score, a low five-figure salary, some outstanding debt, a car loan, and 3% for the down payment. You can still qualify, but it’s a LOT more difficult. And you’re not going to be getting the lowest rate around.

I asked some experts for their mortgage qualifying tips for borrowers who run the highest risk of being turned down. Here’s what they had to say:

7 Mortgage Qualification Tips for Borderline Borrowers

Go FHA

“Applicants with a low credit scores should be sure to look for lenders who offer FHA-insured mortgages. The FHA will insure mortgages with lower credit scores than most others will accept. Borrowers with small savings should look for lenders with low-down-payment requirements. Again, an FHA-insured lender may be the right match, but Fannie Mae and Freddie Mac also have programs with low down payment requirements, so applicants should ask their lenders about those as well,” says David Reiss, a Law Professor at Brooklyn Law School who also writes at REFinBlog.com.

J.D. Crowe, President of Southeast Mortgage of Georgia agrees. “Those with less-than-ideal credit scores sometimes have home loan options through the Federal Housing Administration. The FHA works with approved lenders to help applicants who have lower credit scores and small down payments, and can offer as much as 96.5% financing.”

You can find the other six tips here.

 

Protecting Fannie and Freddie’s Golden Future

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The Federal Housing Finance Agency had requested input on its Update on Implementation of the Single Security and the Common Securitization Platform. By way of background,

The Federal Housing Finance Agency’s (FHFA) 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac includes the strategic goal of developing a new securitization infrastructure for Fannie Mae and Freddie Mac (the Enterprises) for mortgage loans backed by 1- 4 unit (single-family) properties. To achieve that strategic goal, the Enterprises, under FHFA’s direction and guidance, have formed a joint venture, Common Securitization Solutions (CSS). CSS’s mandate is to develop and operate a Common Securitization Platform (CSP or platform) that will support the Enterprises’ single-family mortgage securitization activities, including the issuance by both Enterprises of a single mortgage-backed security (Single Security) and to develop it in a way that allows for the integration of additional market participants in the future. (1)

This is obviously very technical stuff. My own brief comment focused on the need to model and contextualize this development:

FHFA has requested public input on its Update on Implementation of the Single Security and the Common Securitization Platform. The FHFA has made significant progress on the Single Security and the Common Securitization Platform (SS/CSP). In doing so, FHFA has proceeded apace on the technical goals set forth in both the 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac and the 2016 Conservatorship Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions.

Congress’ failure to act on housing finance reform has left it to FHFA to determine the future of the residential mortgage market for the foreseeable future. It is therefore incumbent upon FHFA policymakers to provide further context on how the SS/CSP will operate when fully implemented in 2018.

Thus, FHFA should provide further updates that provide (1) scenarios of how the secondary market may look in 2018 and beyond; and (2) it should also evaluate how SS/CSP would be integrated with the major reform plans that have been proposed by lawmakers and policy analysts, in case Congress were to adopt one of them.

  • FHFA should model how SS/CSP might impact market share of various mortgage originators such as large and small financial institutions as well as how it might impact the credit box for residential borrowers.
  • FHFA should consider how SS/CSP would work with theCorker/Warner bill; the Parrott et proposal; the Bright & DeMarco proposal, among others. FHFA should explain how SS/CSP path dependency might impact each of these proposals. In particular, it should evaluate transition costs that are likely to arise with each option.

FHFA has approached SS/CSP as a technical challenge.  But when implemented, SS/CSP may be setting up a housing finance system that lasts for decades. While Congress has failed to act, FHFA must do its best to evaluate how SS/CSP will affect the housing finance ecosystem.  The stakes for market actors and homeowners are too high not to. (1-2)

The American housing finance system has been the goose that has laid golden eggs decade after decade. We want to be certain that FHFA doesn’t kill it, or even weaken it, unintentionally.

Jumbo Mortgage Deals Ahead

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The Wall Street Journal quoted me in Attention, Jumbo-Mortgage Shoppers: Deals Ahead (behind paywall). It opens,

With more lenders offering jumbo loans, borrowers have more bargaining power to negotiate the best terms.

During the first quarter of this year, 20.3% of all first mortgages originated were jumbo loans, according to Guy Cecala, CEO and publisher of trade publication Inside Mortgage Finance. That’s up from 18.9% last year and 5.5% in 2009, just after the financial crisis.

“At the end of the day, it’s all just supply and demand for capital,” says Doug Lebda, founder and CEO of LendingTree, an online financing marketplace. “Over 60% of people still don’t think they can shop for loans—even rich people. But everything is negotiable.”

Since only a small percentage of jumbo loans are sold to investors, the “vast majority are winding up on bank balance sheets,” according to Michael Fratantoni, chief economist of the Mortgage Bankers Association. But because these loans are held in a lender’s portfolio and aren’t subject to the guidelines of investors purchasing them—as opposed to conforming loans, which must comply with hard-and-fast parameters established by Fannie Mae and Freddie Mac—terms and underwriting standards vary widely.

“Borrowers may find more flexibility with lenders that keep mortgages on their own books,” says David Reiss, a Brooklyn Law School professor who specializes in real estate. “These lenders can usually take a more individualized approach to underwriting than a lender that sells its mortgages off to be securitized with a whole bunch of other mortgages.”

*     *     *

Here are a few things to consider when negotiating a jumbo loan:

• Prepare before applying. “Jumbo lenders are focusing on borrowers with good credit and resources,” said Brooklyn Law School’s Mr. Reiss. Before applying, borrowers should clean up their credit report and keep debt in check. Lenders look at total debt-to-income ratio and overall credit to determine how strong a buyer is; the stronger the buyer, the more the negotiating power.

• Create a relationship. “If you’re a substantial borrower with a substantial relationship with a bank—one of our wealth clients—the guidelines might get a bit more flexible,” saysPeter Boomer, executive vice president of PNC Mortgage, a division of PNC Bank NA.

• Don’t hesitate to negotiate. “They are the customer, and the lender is not doing them a favor,” says Mr. Lebda, of LendingTree. “People are ecstatic when they get approved for a mortgage, but they actually need to think about it the other way—that the lender should be ecstatic for giving them a loan.”

Fannie & Freddie G-Fee Equilibrium

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The Federal Housing Finance Agency’s Division of Housing Mission & Goals has issued its report on Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2015. Guarantee fees (also known as g-fees) are another one of those incredibly technical subjects that actually have a major impact on the housing market. The g-fee is baked into the cost of the mortgage, so the higher the g-fee, the higher the mortgage’s Annual Percentage Rate. Consumer groups and housing trade associations have called upon the FHFA to lower the g-fee to make mortgage credit even cheaper that it is now. This report gives reason to think that the FHFA won’t do that.

The report provides some background on guarantee fees, for the uninitiated:

Guarantee fees are intended to cover the credit risk and other costs that Fannie Mae and Freddie Mac incur when they acquire single-family loans from lenders. Loans are acquired through two methods. A lender may exchange a group of loans for a Fannie Mae or Freddie Mac guaranteed mortgage-backed security (MBS), which may then be sold by the lender into the secondary market to recoup funds to make more loans to borrowers. Alternatively, a lender may deliver loans to an Enterprise in return for a cash payment. Larger lenders tend to exchange loans for MBS, while smaller lenders tend to sell loans for cash and these loans are later bundled by the Enterprises into MBS.

While the private holders of MBS assume market risk (the risk that the price of the security may fall due to changes in interest rates), the Enterprises assume the credit risk on the loans. The Enterprises charge a guarantee fee in exchange for providing this guarantee, which covers administrative costs, projected credit losses from borrower defaults over the life of the loans, and the cost of holding capital to protect against projected credit losses that could occur during stressful macroeconomic conditions. Investors are willing to pay a higher price for Enterprise MBS due to their guarantee of principal and interest. The higher value of the MBS leads to lower interest rates for borrowers.

There are two types of guarantee fees: ongoing and upfront. Ongoing fees are collected each month over the life of a loan. Upfront fees are one-time payments made by lenders upon loan delivery to an Enterprise. Fannie Mae refers to upfront fees as “loan level pricing adjustments,” while Freddie Mac refers to them as “delivery fees.” Both ongoing and upfront fees compensate the Enterprises for the costs of providing the guarantee. Ongoing fees are based primarily on the product type, such as a 30-year fixed rate or a 15-year fixed rate loan. Upfront fees are used to price for specific risk attributes such as the loan-to-value ratio (LTV) and credit score.

Ongoing fees are set by the Enterprises with lenders that exchange loans for MBS, while those fees are embedded in the price offered to lenders that sell loans for cash. In contrast to ongoing fees, the upfront fees are publicly posted on each Enterprise’s website. Upfront fees are paid by the lender at the time of loan delivery to an Enterprise, and those charges are typically rolled into a borrower’s interest rate in the same manner as ongoing fees.

Under the existing protocols of the Enterprises’ conservatorships, FHFA requires that each Enterprise seek FHFA approval for any proposed change in upfront fees. The upfront fees assessed by the two Enterprises generally are in alignment. (2-3)

The report finds that “The average single-family guarantee fee increased by two basis points in 2015 to 59 basis points. This stability is consistent with FHFA’s April 2015 determination that the fees adequately reflected the credit risk of new acquisitions after years of sharp fee increases. During the five year period from 2011 to 2015, fees had more than doubled from 26 basis points to 59 basis points.” (1)

At bottom, your position on the right g-fee level reflects your views about the appropriate role of the government in the housing finance market. If you favor lowering the g-fee, you want to further subsidize homeownership  through cheaper mortgage credit, but you risk a taxpayer bailout.

If you favor raising it, you want to to reduce the government’s footprint in the housing finance market, but you risk rationing credit to those who could use it responsibly.

From this report, it looks like today’s FHFA thinks that it has the balance between those two views in some kind of equilibrium.

Another Housing Bubble?

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Trulia quoted me in Warning Signs: Another Housing Bubble Is Coming. It opens,

Signs show another bubble coming. Some experts have a different opinion.

When the housing market crashed in 2008, it caused what came to be known as ”The Great Recession.” When the bubble burst, it ”sent a shock through the entire financial system, increasing the perceived credit risk throughout the economy,” according to a report published in The Journal of Business Inquiry.

The crash caused homes to lose up to half their value. People became underwater, owing more than their home was worth. And who wants to pay on a mortgage that’s larger than what the home could sell for? Although some people did just that, many more opted to short sell their homes or to simply walk away and have the bank foreclose.

Present Day

Fast-forward to 2016, and we are seeing hot, even ” overheated,” housing markets; bidding wars; rising home prices; and house flippers – all the signs of a housing bubble that’s about to burst. Are we repeating the mistakes we made before? Yes and no. Let’s explore four reasons the housing bubble burst and whether we’re experiencing the same conditions today.

1. Easy Credit

Before the 2008 crash, credit was easy to get. Pretty much, if you were breathing, you could get a mortgage loan. This led to people getting mortgages who ultimately couldn’t afford to pay them back. They lost their homes, and this contributed in large part to the housing crisis. Today the situation is different. ”Credit is still much tighter than it was before the financial crisis,” says David Reiss, professor of law at Brooklyn Law School. ”This is particularly true for those with less-than-perfect credit scores.” He explains: ”There are almost no no-down-payment loans as there were in the early 2000s. Those defaulted at incredibly high rates.”

But what about Federal Housing Administration (FHA) loans? They feature ”low down payments, low closing costs, and easy credit qualifying.” Those are the very features that should sound some warning bells. But before you get too alarmed, keep in mind that the FHA has been making loans to people who do not qualify for a conventional mortgage since 1934. ”While there are low-down-payment loans available from Fannie, Freddie, and the FHA, their underwriting standards appear to be higher than those for low-down-payment products from the early 2000s,” says Reiss.

2. Low Interest Rates

Mortgage rates have been low for so long that you might not realize that was not always the case. In 1982, for example, mortgage rates were 18 percent. From 2002 to 2005, the rates stayed at about 6 percent, which enticed people to take out mortgage loans. And in 2016, we’re seeing historic lows of under 3.5 percent. If rates go up, we might see housing demand and housing prices fall.

3. ARMS

Before the housing crash when home prices were rising fast, many people were priced out of the market with a fixed-rate mortgage because they couldn’t afford the monthly mortgage payments. But they could afford lower payments that were possible with an adjustable-rate mortgage – until that rate adjusted up. In 2005, 38.5 percent of the mortgage market was ARMs. But in 2015, that amount has dropped considerably to 5.3 percent.

4. A Buying Frenzy

There’s an old story that before the stock market crash of 1929, Joseph Kennedy, Sr., sold his shares. Why? Because he received a stock tip from a shoeshine boy. Kennedy figured, the story goes, that if the stock market was popular enough for a shoeshine boy to be interested, the speculative bubble had become too big.

Before the housing crash, this country saw a home buying frenzy similar to what happened before the stock market crash. Everyone from lenders to rating agencies to investors (foreign and American) to investment bankers to home buyers was eager to get into the mortgage game because house values kept rising. Today, we are seeing a similar buying frenzy in some markets, such as San Francisco, New York, and Miami . Some experts think that the price increases of homes in those areas are not sustainable. They say that because heavy foreign investment in those areas is part of what’s driving up prices, if those investments slow or stop, we could see a bubble burst.

So what do some experts think?

David Ranish, owner/broker for The Coastline Real Estate Group in Laguna Beach, CA, says: ”There are concerns about another housing bubble, but I do not see it. The market could stabilize, but a complete collapse is highly unlikely.”

Bruce Ailion, an Atlanta, GA, real estate expert, says,” ”Five to six years ago, I was a buyer of homes. Today I am a seller.”

David Reiss says, ”It is probably a fool’s game to predict the future of the housing market or whether we are in a bubble that is soon to burst.”

Freddie and Fannie Nightmare Scenario

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For a number of years, I have warned of the increased operational risk that results from leaving Fannie Mae and Freddie Mac in the limbo of their conservatorships. “Operational risk” refers to risks that a company faces from things like poor procedures, systems, policies and employee supervision.

The Inspector General of the Federal Housing Finance Agency has released three reports that address aspects of Fannie and Freddie’s operational risk (along with that of the Federal Home Loan Bank System). The three reports are:

The last of the three reports notes,

As the regulator of Fannie Mae and Freddie Mac (collectively, the Enterprises) and of the Federal Home Loan Banks (FHLBanks), the Federal Housing Finance Agency (FHFA) is tasked by statute to ensure that these entities operate safely and soundly so that they serve as a reliable source of liquidity and funding for housing finance and community investment. Examinations of its regulated entities are fundamental to FHFA’s supervisory mission.

FHFA has directed its Division of Enterprise Regulation (DER) to conduct supervisory activities of the Enterprises and its Division of Federal Home Loan Bank Regulation (DBR) to conduct these activities for the FHLBanks. When DER or DBR identifies a deficiency, it will classify the deficiency as a Matter Requiring Attention (MRA), a violation, or a recommendation. According to FHFA, MRAs are “the most serious supervisory matters.” FHFA requires the regulated entities to promptly remediate MRAs. Examiners are required to “check and document” the progress of MRA remediation.

In FHFA Office of Inspector General’s (OIG) 2016 Audit and Evaluation Plan, we explained our intent to focus our resources on programs and operations that pose the greatest financial, governance, and reputational risk to FHFA, the Enterprises, and the FHLBanks. One of the four areas we identified was FHFA’s rigor in its supervision of the Enterprises and the FHLBanks. According to FHFA, a key component of effective supervision is close oversight of efforts by an entity it regulates to correct identified supervisory concerns. This evaluation is one in a series of OIG reports that assess the robustness of FHFA’s policies, procedures, and practices governing its oversight of remediation of supervisory concerns by a regulated entity.

In this evaluation, we compared the MRA tracking systems used by two federal financial regulators and DBR to those used by the DER Fannie Mae and Freddie Mac examination teams. We found substantial weaknesses in DER’s tracking systems that limit significantly the utility of those systems as a tool to monitor the Enterprises’ efforts to remediate deficiencies giving rise to MRAs. We also reviewed a sample of open and closed MRAs issued to each Enterprise by DER to assess whether DER examiners performed independent assessments of the timeliness and adequacy of each Enterprise’s efforts to remediate the MRA. Our review found a lack of consistent independent analysis by DER examiners of the timeliness and adequacy of each Enterprise’s remedial efforts. (2)

My nightmare scenario is that Fannie and Freddie operations have slowly degraded as they have been left to linger in the limbo of conservatorship. This kind of degradation is not really observable from the outside and its effects are not known until something really bad happens. Maybe their hedging strategy is poorly designed, maybe their underwriting is allowed to become outdated, maybe too many employees lose their drive.

Eight years of conservatorship can do that to a company. When it happens, you can be sure that members of Congress will blame a whole host of people for this failure. But the blame will sit with Congress. Because Democrats and Republicans cannot come up with a reasonable compromise, we are left with two zombie organizations dominating our housing finance system.

Hopefully, I am wrong about this. Or maybe I am right about it but we dodge the bullet by some stroke of luck. But the longer we leave the two companies in this state, the more likely it is that things go bad and the taxpayer is left holding the bag once again.