- Federal Housing Finance Agency released its annual Guarantee Fee Report, which tracks the upward trend in single family guarantee fees charged by Fannie Mae and Freddie Mac. The Housing and Economic Recovery Act of 2008 requires FHFA to submit a report to Congress annually on guarantee fees. Guarantee fees are intended to cover the costs Fannie Mae and Freddie Mac incur for guaranteeing the payment of principal and interest on single-family loans they purchase from mortgage lenders. These costs include projected credit losses from borrower defaults over the life of the loans, administrative costs, and a return on capital.
- The U.S. Department of Housing and Urban Development in conjunction with Vanderbilt University released the Family Options Study in which presents the short-term impacts of the interventions in five domains related to family well-being: (1) housing stability, (2) family preservation, (3) adult well-being,(4) child well-being, and (5) self-sufficiency.
Tag Archives: Federal Housing Finance Agency
The Importance of Understanding G-Fees
The Federal Housing Finance Agency has released Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2014. Ok, ok, this is some really technical stuff. But it gives us a lot of important information about what goes into the cost of a home mortgage.
The executive summary opens, “The Housing and Economic Recovery Act of 2008 (HERA) requires the Federal Housing Finance Agency (FHFA) to submit reports to Congress annually on the guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises).” (2, footnotes omitted) The report finds that “the average level of guarantee fees charged has increased since 2009. The guarantee fees are currently two-and-a-half times their previous level; from 2009 to 2014, average fees increased from 22 basis points to 58 basis points. From 2013 to 2014, average fees increased from 51 basis points to 58 basis points.” (2, footnote omitted)
For all of you non-experts out there, a basis point is 1/100th of a percentage point. So a guarantee fee (or g-fee in the lingo) of 58 basis points increases the interest rate paid by more than half a percentage point (for instance, from 4.5% to 5.08%). So homeowners should want to understand why g-fees have more than doubled since 2009.
The report breaks down how g-fees gradually increased in response to Congressional and FHFA requirements, some of which are not tied to housing finance goals at all. For instance, Congress added ten basis points to fund an extension of a tax cut.
Many have argued that g-fees should be kept as low as possible in order to help out the housing market. I do not take that position, in large part because cheap credit does not necessarily lower the cost of housing; sellers may just be able to raise the price of their homes in a cheap credit environment. I also believe that the housing market and the mortgage market need to achieve some sort of equilibrium and unnaturally low g-fees will distort such an equilibrium.
The price of the g-fee should reflect the real costs of the g-fee. For instance, it should cover the cost of losses that result from borrower default. It should not be used to fund programs unrelated to housing. G-fees that are unnaturally high distort the housing finance market and make homeowners subsidize other constituencies. Federal housing finance policy tends to get screwed up if it veers too much from its fundamentals, so we should not ask too much of the g-fee.
Fannie and Freddie have been in limbo ever since they entered conservatorship in 2008. The longer they are in that limbo, the more likely it is that Congress will use them to do all sorts of things that do not relate to maintaining a liquid housing finance market. This study outlines how the g-fee has morphed over time and is a wake-up call to homeowners and policy makers alike to set Fannie and Freddie on a healthy course for the long term, starting with that obscure and technical g-fee.
High Risk at Fannie and Freddie
FHFA Director Watt
The Federal Housing Finance Agency released its 2014 Report to Congress. It summarizes many interim reports and press releases that were released over the previous year, many of which have been covered by REFinBlog as they came out. I was struck, however, by the passages about the operational risk that Fannie and Freddie face. I have been concerned with operational risk at Fannie and Freddie for some time, as the two enterprises have languished in conservatorship limbo for far too long.
The Report of the Annual Examination of Fannie Mae states that
The level of operational risk remains high and largely reflects the risk posed by execution of Fannie Mae’s strategic plan to replace its existing information technology infrastructure. Management has made significant progress in stabilizing the current information technology environment, with improvements in the change management process and reductions in production outages. Further, progress was made in establishing an out-of-region data center that is a critical component for supporting information systems and providing for business continuity in the event of a disaster. As Fannie Mae implements this plan, however, the level of operational risk will remain elevated. Risks associated with the execution, deployment, and integration with the CSP [Common Securitization Platform] and the move to a Single Security, while addressing ongoing IT infrastructure issues, will also introduce a significant level of inherent operational risk to the organization. Effective project management will be critical to mitigate the operational risk arising from these efforts.(14, emphasis added)
The Report of the Annual Examination of Freddie Mac indicates that Freddie faces somewhat different operational risks:
Operational risk, including risks associated with information technology systems, remains a concern primarily because of resource requirements and operational complexities of major strategic initiatives (including integration with the CSP), developing information security and privacy protection capabilities, and heightened risk during the transition to the new risk management structure.
Information security is one of the primary operational risks Freddie Mac faces given the proliferation of cyber crimes and the high probability of new cyber attacks targeted at large organizations. Freddie Mac’s operational framework is highly complex. Information security within the Enterprise is more important than ever given the pervasiveness of cyber-related threats. In addition to external threats, Freddie Mac faces other challenges that may continue to elevate operational risk and increase the likelihood of significant operational incidents and losses. (17, emphasis added)
While neither of these passages is terrifying — as in, here-is-the-next-trigger-for-a-bailout terrifying — they do make me pause and ask whether the GSEs in their current form are up to the challenge of handling this period of “heightened risk.”
Those in Congress who are impeding GSE reform are on notice that Fannie and Freddie face high levels of operational risk. If the next crisis results from that risk, it is on them.
New FHA Guidelines No Biggie
(Original Purchases in Levittown Funded in Large Part by FHA Mortgages)
Law360 quoted me in New Guidelines For Bad FHA Loans Won’t Boost Lending (behind paywall). It opens,
The federal government on Thursday provided lenders with a streamlined framework for how it determines whether the Federal Housing Administration must be paid for a loan gone bad, but experts say the new framework will have limited effect because it failed to alleviate the threat of a Justice Department lawsuit.
The U.S. Department of Housing and Urban Development provided lenders with what it called a “defect taxonomy” that it will use to determine when a lender will have to indemnify the FHA, which essentially provides insurance for mortgages taken out by first-time and low-income borrowers, for bad loans. The new framework whittled down the number of categories the FHA would review when making its decisions on loans and highlighted how it would measure the severity of those defects.
All of this was done in a bid to increase transparency and boost a sagging home loan sector. However, HUD was careful to state that its new default taxonomy does not have any bearing on potential civil or administrative liability a lender may face for making bad loans.
And because of that, lenders will still be skittish about issuing new mortgages, said Jeffrey Naimon, a partner with BuckleySandler LLP.
“What this expressly doesn’t address is what is likely the single most important thing in housing policy right now, which is how the Department of Justice is going to handle these issues,” he said.
The U.S. housing market has been slow to recover since the 2008 financial crisis due to a combination of economics, regulatory changes and, according to the industry, the threat of litigation over questionable loans from the Justice Department, the FHA and the Federal Housing Finance Agency.
In recent years, the Justice Department has reached settlements reaching into the hundreds of millions of dollars with banks and other lenders over bad loans backed by the government using the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act.
The most recent settlement came in February when MetLife Inc. agreed to a $123.5 million deal.
In April, Quicken Loans Inc. filed a preemptive suit alleging that the Justice Department and HUD were pressuring the lender to admit to faulty lending practices that they did not commit. The Justice Department sued Quicken soon after.
Policymakers at the Federal Housing Finance Agency, which serves as the conservator for Fannie Mae and Freddie Mac, and HUD have attempted to ease lenders’ fears that they will force lenders to buy back bad loans or otherwise indemnify the programs.
HUD on Thursday said that its new single-family loan quality assessment methodology — the so-called defect taxonomy — would do just that by slimming down the categories it uses to categorize mortgage defects from 99 to nine and establishing a system for categorizing the severity of those defects.
Among the nine categories that will be included in HUD’s review of loans are measures of borrowers’ income, assets and credit histories as well as loan-to-value ratios and maximum mortgage amounts.
Providing greater insight into FHA’s thinking is intended to make lending easier, Edward Golding, HUD’s principal deputy assistant secretary for housing, said in a statement.
“By enhancing our approach, lenders will have more confidence in how they interact with FHA and, we anticipate, will be more willing to lend to future homeowners who are ready to own,” he said.
However, what the new guidelines do not do is address the potential risk for lenders from the Justice Department.
“This taxonomy is not a comprehensive statement on all compliance monitoring or enforcement efforts by FHA or the federal government and does not establish standards for administrative or civil enforcement action, which are set forth in separate law. Nor does it address FHA’s response to patterns and practice of loan-level defects, or FHA’s plans to address fraud or misrepresentation in connection with any FHA-insured loan,” the FHA’s statement said.
And that could blunt the overall benefits of the new guidelines, said David Reiss, a professor at Brooklyn Law School.
“To the extent it helps people make better decisions, it will help them reduce their exposure. But it is not any kind of bulletproof vest,” he said.
Monday’s Adjudication Roundup
- The CFPB increased PHH Corp.’s penalty to $109 million from $6.4 million on appeal, while upholding an administrative judge’s ruling that the firm was involved in a mortgage insurance kickback scheme.
- A class of PHH borrowers have been granted cert to the U.S. Supreme Court alleging that PHH Corp. violated the Real Estate Settlement Procedures Act.
- NY Court of Appeals bars mortgage-backed securities suit for $330 million against Deutsche Bank AG due to a six-year statute of limitations that started when the contract was signed.
- Nomura Holdings Inc. is appealing $806 million verdict in suit brought by the Federal Housing Finance Agency for selling bad mortgage-backed securities to Fannie Mae and Freddie Mac.
- The Securities and Exchange Commission brought suit against a New York broker for $4.1 million for allegedly selling unregistered securities through several entities.
Friday’s Government Reports
- Consumer Financial Protection Bureau (CFPB) recently released a report entitled A Closer Look a Reverse Mortgage Advertisements and Consumer Risks which discusses its findings regarding the failure of reverse mortgage ads to mention the considerable risks involved in reverse mortgage loans (while extolling their virtues). The CFPB also released a consumer advisory to warn seniors about the potential pitfalls of reverse mortgages.
- A new rule requiring a Three Day Review Period for Mortgage applications submitted after August 1st, 2015 will only apply if certain (3) changes are made before closing: 1. Changes in Annual Percentage Rate (APR); 2) Prepayment terms; 3) Basic loan product changes (i.e. from fixed at adjustable rate). The CFPB has released a factsheet detailing how the new rule functions.
- The Federal Housing Finance Agency unveiled an interactive online map to help “in the money borrowers” identify the opportunity (those eligible for The Home Affordable Refinance Program aka HARP).
FHFA’s $500MM Win
Bloomberg quoted me in Nomura, RBS Defective-Bond Suit Loss Seen Spurring Deals. It reads, in part,
Nomura Holdings Inc. and Royal Bank of Scotland Group Plc may face $500 million in damages for what a judge called an “enormous” deception in the sale of defective mortgage-backed securities, a ruling that may spur other banks to settle similar claims tied to the 2008 financial crisis.
Nomura and RBS were excoriated in a 361-page opinion by U.S. District Judge Denise Cote in Manhattan, whose ruling followed the first trial of claims that banks sold flawed securities to government-owned mortgage companies. After a three-week trial, Cote said they misled Fannie Mae and Freddie Mac and set a damages formula that may result in the government winning about half its original claim of $1 billion.
“The offering documents did not correctly describe the mortgage loans,” Cote, who heard the case without a jury, wrote Monday. “The magnitude of falsity, conservatively measured, is enormous.”
Before the trial, FHFA had reached $17.9 billion in settlements with other banks, including Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. The ruling against Nomura and RBS may encourage other banks to settle mortgage-related suits brought by regulators and private investors rather than face the bad publicity and cost of an adverse judgment, said Robert C. Hockett, a professor at Cornell Law School.
“They look pretty bad,” Hockett said in an interview. “They look like the strategy has blown up in their faces.”
Cote ordered the Federal Housing Finance Agency, which filed the case, to propose how much the banks should pay as a result of her ruling.
* * *
Cote rejected the banks’ claim that the housing crash, and not defects in the loans, was responsible for the collapse of the mortgage-backed securities.
David Reiss, a professor at Brooklyn Law School, called Cote’s ruling “incredibly thorough.” The judge included detailed factual rulings that may make it difficult for Nomura and RBS to win on appeal, he said.
