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Tag: Secondary markets

  • Deb Jones on why 2024 could be a 'transition year'

    Deb Jones on why 2024 could be a 'transition year'

    Deb Jones, senior vice president, director of secondary and capital markets, Citizens Bank, has been through a lot of business cycles during her long tenure as a mortgage executive but she thinks the current environment is unique in its challenges.

    It’s been characterized by a fast-moving spike in interest rates, inventory shortage and high housing valuations, but at the time of this writing it appeared the dynamic could change next year.

    In the interview that follows, Jones looks back on 2023 and ahead to next year, drawing on her experience as head of the Mortgage Bankers Association Secondary and Capital Markets Committee and as an advocate for women in the business to inform her comments.

    Bonnie Sinnock

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  • Fitch actions cast Fannie Mae, Freddie Mac conservatorships in new light

    Fitch actions cast Fannie Mae, Freddie Mac conservatorships in new light

    Fitch’s recent lowering of Fannie Mae and Freddie Mac credit ratings following an earlier U.S. downgrade highlights some considerations related to whether they should eventually be removed from conservatorship.

    For one, as much as the downgrades may not reflect well on the public ties the government-sponsored enterprises have, the rating actions suggest those links still beat the alternative for the GSEs.

    “The implicit government support is still the driver of the ratings, and the GSEs would be rated lower without it,” said Eric Orenstein, senior director in Fitch’s nonbank financial institutions group.

    So while the earlier lowering of a U.S. sovereign rating did hurt Fannie and Freddie’s equivalents for long-term issuer default, senior unsecured debt and government support, their public ties are still considered a relative positive. 

    That dichotomy is in line with the fact Fannie and Freddie’s mortgage-backed securities aren’t normally rated because of their government-related support, fueling debate about the extent to which downgrades influence a bond market that drives borrowing costs.

    “There’s really not an official rating for the MBS, so the assumed rating is whatever the Treasury is rated,” said Walt Schmidt, senior vice president, mortgage strategies, at FHN Financial. “From that standpoint, I don’t think this has a direct effect.”

    And while Fitch said the U.S. has seen “a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters,” Freddie and Fannie’s financials are strong, suggesting they’re not immediate taxpayer risks.

    Fitch confirmed it “does not rate any MBS products directly issued by the GSEs.” If they did, those securities would theoretically have a rating that matched Fannie and Freddie’s long-term IDR.

    However, the credit risk transfer securities the GSEs use to sell off some of their risk to private-label investors based on reference pools of their loans do get rated. Fitch lowered the ratings of 435 of these. Only those with top ratings were impacted.

    Fitch groups Fannie and Freddie’s CRTs with non-agency residential mortgage-backed securities, but otherwise securitization ratings that it considers to be part of the private market weren’t affected.

    While some GSE and United States ratings are now one-notch down from the highest possible grade, they have generally remained at the upper end of the scale. Also, Fannie and Freddie’s short-term issuer default rating remained unchanged at the highest rating. (In addition to Fannie and Freddie, Fitch also had downgraded the Federal Home Loan Banks of Atlanta and Des Moines at press time.)

    Fitch’s downgrade of Fannie is “not being driven by fundamental credit, capital, or liquidity deterioration,” the GSE said in an emailed statement sent in response to inquiries about the rating actions, echoing some of the wording Fitch used to describe both enterprises.

    Fannie and Freddie’s regulator, the Federal Housing Finance Agency, issued a similar statement, while adding that, “As no one can predict future outcomes, FHFA is carefully watching the ratings downgrade to assess its impact on the MBS markets and the GSEs.” 

    There has been disagreement among rating agencies related to U.S. sovereign rating. Kroll Bond Rating Agency and Moody’s Investors Service, in contrast to Fitch, reaffirmed top ratings for the United States on Thursday. 

    But while disagreement among rating agencies and other aforementioned factors do blunt the impact of the Fitch downgrades on the mortgage market, it may not be entirely immune to them.

    There might be an impact on Fannie and Freddie’s unsecured debt in particular given the change in that rating and the fact that they’re more reliant on it because those bonds are not backed with mortgage collateral the way agency MBS are.

    And while there’s some disagreement on this point, even agency MBS could be at least peripherally affected by the downgrades in ways that could put upward pressure on financing costs, depending on whether other rate drivers outweigh them.

    “I think there is an indirect effect in the whole downgrade story. It perhaps has contributed to slightly higher yields, but there are a lot of cross currents in the market,” Schmidt said.

    Bonnie Sinnock

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  • FHFA rule change could expand the number of suspended counterparties

    FHFA rule change could expand the number of suspended counterparties

    The Federal Housing Finance Administration is looking to make it easier to put entities and people into its Suspended Counterparty Program, a proposed rule change states.

    This would require Fannie Mae, Freddie Mac and the Federal Home Loan Banks to report to the FHFA any individual or company they do business with that committed “certain forms of misconduct” in the past three years. The current program was established by FHFA letter in June 2012 and amended in December 2015.

    Today, the SCP list is limited to those that have committed and are convicted of criminal offenses. “However, in FHFA’s experience of administering the SCP, it has determined that this standard is too narrow; specifically, it does not authorize suspension of counterparties that have been found to have committed various forms of misconduct in the context of civil enforcement actions,” the proposed amendment to the rule said.

    It is looking to broadly expand the definition of misconduct “to all manner of civil enforcement proceedings,” including cases before administrative law judges, as well as qui tam actions (also known as whistleblower cases) such as those brought under the False Claims Act.

    While many of those civil cases are settled without an admission of misconduct, the proposal noted, the change could allow the FHFA to put those entities on the SCP list. “FHFA has determined that it is appropriate to permit suspension where enforcement claims are resolved without admission of misconduct,” the proposal said.

    For example, in the most recent qui tam settlement involving Movement Mortgage, the company specifically did not admit any legal liability for the False Claims Act violations. 

    Other changes would allow for placement on the SCP for criminal or civil misconduct in connection with the management or ownership of real property.

    “Amending the Suspended Counterparty Program will help strengthen FHFA’s ability to protect its regulated entities from business risks presented by individuals or institutions who engage in misconduct,” said Director Sandra Thompson, in a press release. “The proposed rule will strengthen FHFA’s ability to ensure the regulated entities remain safe and sound so they continue to serve as reliable sources of liquidity.”

    The changes would also create an ability to vacate suspension orders in certain circumstances.

    Currently, the SCP list has 170 individual or company names, most of which have a definitive end date for the suspension. The person on the list the longest time, starting on April 15, 2013 with an indefinite suspension, is Lee Farkas, the convicted mortgage fraudster who ran Taylor, Bean & Whitaker.

    First Mortgage and its convicted founder and chairman Ron McCord — a former Mortgage Bankers Association chairman — are both also on the list. Live Well Financial, the defunct reverse mortgage lender, was the most recent addition.

    This proposal will be opened for a 60-day comment period once it is published in the Federal Register.

    Brad Finkelstein

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  • GOP bill that would roll back mortgage pricing change passes House

    GOP bill that would roll back mortgage pricing change passes House

    “If you want to protect middle class borrowers in your district from a new tax, you will support this bill,” Rep. Patrick McHenry, R.-N.C., chairman of the House Financial Services Committee said Friday.

    Sarah Silbiger/Bloomberg

    The Middle Class Borrower Protection Act of 2023 has cleared one chamber of Congress with Republican support.

    The bill aims to roll back the latest update of grids Fannie Mae and Freddie Mac use to give lower-income borrowers breaks with some cross-subsidizing increases for those more well off, while still ensuring risk-based pricing is maintained.

    Supporters like Rep. Patrick McHenry, R.-N.C., chairman of the House Financial Services Committee, said they felt the regulator of the government-sponsored enterprises went too far in raising prices for higher-income borrowers and giving those with less wealth breaks.

    “If you want to protect middle class borrowers in your district from a new tax, you will support this bill,” McHenry said Friday.

    He and other supporters have shown particular concern that in some cases, the latest price breaks have gone to lower-income borrowers further down the credit spectrum than those receiving hikes.

    Opponents of the bill have noted that while there have been relative increases for higher-income borrowers and some decreases for those with less wealth, those in the latter category generally are still paying more than in the former.

    Reversing the small breaks for people with lower income would be harder on them than the increases would be on their wealthier counterparts, according to a letter Americans for Financial Reform recently sent to McHenry and Maxine Waters, D.-Calif., ranking member of the Committee.

    “The bill’s title is ironic because it would, in fact, make mortgages more expensive for many middle-class American families,” AFR said in the letter.

    The price changes have on a net basis increased fees overall in line with directives aimed at rebuilding capital at the GSEs.

    Federal Housing Finance Agency Director Sandra Thompson has said she feels the latest price changes have been misunderstood and that she’s open to other ideas for how the current framework for capital goals and pricing could be aligned.

    Whether the legislation has enough momentum to get backing from both chambers of Congress in a situation where the House is narrowly controlled by Republicans and the Senate is dominated by a slim majority of Democrats remains to be seen.

    Bonnie Sinnock

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  • FHFA sets timeline for credit score and reporting updates

    FHFA sets timeline for credit score and reporting updates

    The Federal Housing Finance Agency has released some future milestone dates for a process that would update consumer credit measures used in mortgage underwriting, make the use of various sources more competitive and potentially extend lending to more borrowers.

    The process, which is set to start next year, will loop in mortgage companies and others affected by the updates so that some of their concerns about possible higher costs and other unintended consequences can be considered and addressed, according to the agency.

    “Today’s announcement highlights FHFA’s commitment to stakeholder engagement as the enterprises implement the new credit score models and transition to a bi-merge reporting requirement,” said Director Sandra Thompson. “Obtaining public input in a transparent manner and considering the feedback is critical to a successful transition.”

    FHFA plans to start in the first quarter of 2024 by changing the process used by lenders selling loans to government-sponsored enterprises Fannie Mae and Freddie Mac from one based on three merged credit reports (from Equifax, Experian and TransUnion) to two.

    Next, it plans to transition Fannie and Freddie’s underwriting away from reliance solely on FICO’s classic credit score.

    Starting around the third quarter of next year, they’re set to start working on the first phase, which will involve delivering updated scores validated last year and associated disclosures, including an one from FICO known as 10T. The other one that was validated last October is VantageScore 4.0. VantageScore is a collaboration between the three credit bureaus.

    The second phase will then ideally follow in the fourth quarter of 2025. At that point, Fannie and Freddie will be working on putting the new scores into use not only for pricing mortgages they buy, but also for setting capital requirements and other processes.

    In addition to buying loans within certain parameters with the aim of furthering their affordable housing missions, the two GSEs are currently positioned as a backstop for the market and have been working to retain a certain amount of capital relative to the credit risks they take on in order to protect their financial stability.

    Fannie and Freddie were brought into government conservatorship when the Great Recession’s housing crash threatened their finances and have maintained ties to the U.S. Treasury.

    Updated scores could change the way they size up risks but aren’t designed to add any. Rather, they incorporate things like trended data, for example, such that they examine more how a borrower manages debt over time rather than at a particular point.

    The GSEs have done some ad-hoc experiments with underwriting based on more advanced borrower assessments like this but scores that incorporate them would have even more influence in the underwriting process as they’re more of a primary influence on whether a borrower qualifies for a loan and what fees lenders are charged in selling it. Those fees influence what the borrower pays for mortgage credit.

    At one point under earlier leadership the FHFA was concerned about VantageScore’s ties to the credit reporting agencies. A different director later reversed that decision.

    Former Fannie Mae President and CEO Timothy Mayopoulos, who recently was named to lead the Silicon Valley bridge bank, was an advocate of updated underwriting and fell in love with a credit reporting executive, who he later married. A watchdog agency flagged this as a conflict of interest at one point early in their relationship. He left the GSE long before the current decision to accept VantageScore.

    The current leadership of the GSEs and their regulator seem to be taking an even-handed approach to the different credit reporting companies and score providers involved by accepting both types of advanced models.

    However, Rep. John Rose, R.-Tenn., has expressed some concerns about the bi-merge process.

    “Lenders may not be able to accurately price risks and manage their mortgage-related exposures if they are relying on a limited picture of borrowers’ credit files,” he said in a letter sent to Thompson last month.

    Brad Finkelstein contributed reporting to this article.

    Bonnie Sinnock

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