A weekend topic starting with Housing Wire. “This week, FHFA Director Mark Calabria and the GSEs have rolled out an across-the-board 50 bp delivery fee on all refinances. Since the onset of COVID-19, and despite heroic efforts by the Fed and Congress with the most extraordinary intervention, the FHFA has simply shown the proverbial middle finger to the housing finance system, to consumers, and especially to nonbank lenders who have been critical to credit availability in creating home ownership. The profits posted by both GSEs in their recent earnings are only because the of the quantitative easing from the Federal Reserve. Powell is the hero here.”
From National Mortgage News. “The ill-considered action by the FHFA shows just how deep is the potential capital deficit to support losses lurking inside Fannie Mae and Freddie Mac. Perhaps more ominously, the FHFA action is directly in conflict with the policy of the FOMC, which is deliberately using low interest rates and high volumes of loan refinancing in all sectors to reflate the crippled U.S. economy. ‘The FHFA could have at least made the change effective Oct. 1,’ one angry issuer told NMN. ‘This change will cost me millions of dollars on loans in pipeline that did not price in this loan-level pricing adjustment.’”
From CNBC. “There are currently just under 4 million borrowers in government and private sector mortgage forbearance programs. These allow them to delay their monthly payments for up to a year. ‘Rates are higher for refinances,’ noted Matthew Graham, COO of Mortgage News Daily. ‘FHFA sees that and concludes lenders have money to give on refis. It’s a tax based on jealousy, greed, and probably more than a little bit of disdain.’”
From a press release. “‘These FHFA-directed price adjustments do more than work against the hopeful economic rebound and the original agency charters, they undermine trust and spur uncertainty at a crucial time. Who knows where the next no-warning directive will strike? Non-owner-occupied loans? High loan-to-value?’ commented Phil Rasori, COO of Mortgage Capital Trading, Inc., a leading mortgage hedge advisory firm. ‘The only way lenders can protect themselves from these risks is to increase margins across the board, according to our analysis on the order of seventy-five to one hundred basis points in total.’”
An email I received from Edward J. Pinto, Director, AEI Housing Center. “The Housing Lobby has described the GSEs’ imposition of a new 1/2 point market adjustment fee to offset risk on refinance loans as: ‘outrageous,’ ‘a cash grab,’ and ‘based on jealousy, greed, and disdain.’ Nothing could be further from reality.”
“First, a few facts based on our Nowcast rate lock data from Optimal Blue: The GSEs’ share of the entire cash out refinance market is now at 90%, up from about 75% at the beginning of 2020. The GSEs’ share of the entire rate and term refinance market is now at 80%, up from about 63% at the beginning of 2020. Recently the combined volume of cash out and rate and term refinance rate locks has been more than double the level a year earlier.”
“To put the new 1/2 point upfront fee in perspective, mortgage rates on refinance loans have dropped nearly 100 basis points since early January 2020. The new 1/2 point fee is equal to about 13 basis points in rate, a minor impact compared to the massive drop in rates just since early January.”
“The FHA, VA, and private sector refinance shares are down because the agencies and lenders have appropriately tightened credit standards. While the GSE’ standards have also tightened, it has not been enough to slow their massive share and volume increases. Mortgage lending history teaches us that lending into a vacuum is dangerous and nothing indicates that more than a massive increase in share compared to ones competitors.”
“Finally, it is worth noting that a 30 year fixed rate, fully documented 65% loan-to-value cash-out refinance loan has default proclivity under stress that is the same as a 91-95% loan-to-value purchase loans with the same metrics. And the GSEs’ currently guarantee cash out loans up to 80% loan-to-value.”
“There are many reasons refinance loans are so risky, but first and foremost is that, unlike purchase transactions, there is no arm’s length purchase price to benchmark to. Thus it is all too easy to ask: ‘what do you need the value to be?’”
“The new 1/2 point market adjustment fee is not only appropriate, but it would have been a dereliction of regulatory oversight not to have taken action.”
From Reuters. “The head of Canada’s mortgage agency urged lenders to avoid offering home loans to riskier borrowers insured by its private rivals warning that excessive household borrowing will make the ‘pain of the deferred COVID-19 economic adjustment worse.’ Canada Mortgage and Housing Corp (CMHC) has lost mortgage insurance market share to private insurers after the government-backed agency tightened underwriting standards from July 1 as it forecast home price declines of as much as 18% over the next 12 months.”
“‘While we would prefer our competitors followed our lead for the good of our economy, they nevertheless remain free to offer insurance for those whom we would not,’ CMHC Chief Executive Evan Siddall said in the letter to lenders dated Aug. 10 and made public on Wednesday. ‘We don’t think our national mortgage insurance regime should be used to help people buy homes with negative equity.’”
The Globe and Mail. “Siddall’s letter chastises a long list of prominent mortgage lenders for helping heavily indebted borrowers buy homes, which he argues could harm economic growth. The pointed arguments and blunt tone of the letter, which asks mortgage lenders to ‘put our country’s long-term outlook ahead of short-term profitability’ and cites a ‘dark economic underbelly to this business,’ arrived without warning.”
“Far from having its intended effect, it left some senior bankers puzzled and others bristling, according to multiple sources familiar with the response within the financial sector. The new rules made it harder for some borrowers to get CMHC mortgage insurance, and disqualified as much as 30 per cent of the agency’s usual applicant pool, three sources said.”
“Before announcing stricter standards, CMHC held a conference call to brief mortgage lenders and federal Department of Finance officials. The plan was greeted as unorthodox, because it restricted access to mortgages at a moment when governments were pumping tens of billions of dollars into stimulus programs designed to keep credit flowing amid a global public-health crisis.”
“Dan Eisner, CEO of Calgary-based mortgage brokerage True North Mortgage, said both Genworth MI and Canada Guaranty ‘promptly’ contacted him after CMHC announced its new criteria and urged him to ‘send us a complete package of deals,’ and not only those that CMHC would no longer approve. He likened the rationale to other types of insurers that take on both riskier and more stable clients. ‘They don’t want all the drunk drivers for car insurance,’ he said.”
From Better Dwelling. “Canada’s national housing agency discreetly asked lenders to curb risky lending. Evan Siddall, the head of the Canada Mortgage and Housing Corporation (CMHC) sent a confidential memo to lenders this week, requesting they tighten lending. Instead of taking the advice, the industry leaked parts of the memo. The CMHC has responded by releasing the whole memo, including their rationale for the request. It turns out lenders aren’t your friends. Surprising, I know.”
“The letter requests banks curb risky loans, but not because they’re worried about banks. Siddall starts with a request to ‘… continue to support CMHC’s mortgage insurance activity in preserving a healthy mortgage sector in Canada.’ He follows with policy changes they’ve made, as well as the negative consequences Canadians would be exposed to if they didn’t.”
“For those that need a recap, the CMHC tightened the criteria for mortgage insurance. Starting in July, credit scores were limited to a hard minimum of 680. A hard minimum meaning there’s no room for flexibility, as previously accepted. The agency also won’t insure properties bought with borrowed down payments, and removed exceptions to debt service ratios. Generally, just promoting sound underwriting policy at a time where there’s increased risk. They can only suggest their competitors do the same.”
“In Siddall’s own words, ‘borrowing creates a very significant economic drag on our outlook.’ Since debt is future income used today, expansion of household debt will slow future economic activity. The memo warns the slow economic growth going into the future can be an issue. A particularly worrisome one, considering this implies a longer recovery from the current recession.”
“A significant number of homebuyers think housing risk disappeared, because defaults haven’t jumped. Defaults can’t rise right now, because lenders stopped collecting payments from almost a fifth of mortgages. The CMHC reminded lenders they ‘always anticipated a delayed impact: weakening in late 2020 and 2021 once government income supports unwind, bankruptcies increase and unemployment starts to bite.’ A sentiment also reflected by the Bank of Canada, which also expects defaults to rise next year. This isn’t new information to lenders. They know this, despite aggressively chasing first-time buyers.”
“Why Banks Don’t Give A Sh*t. A lot of lenders learned the wrong lessons from the US housing bubble, and one is on negative equity. After the US bubble popped, defaults soared because of investors, not first-time homebuyers. Investors with great credit scores strategically disposed of assets, to lower liabilities. Actual homes occupied by families, paid bills right through negative equity.”
“These negative equity homeowners were the biggest losers in the whole transaction. They would have to pay to sell, and a lot didn’t have the money to do that. First-time buyers aren’t known for sitting on huge capital reserves. Instead, when they get hit with negative equity, they attempt to ride it out. In the US, there’s millions of people still paying off their 2008 purchase, that haven’t accumulated any wealth. Lenders on the other hand, racked up all of those interest and principal payments.”
“The government has created so much moral hazard, there’s no reason for lenders to act responsibly. The government pumped the gas on mortgage growth, even as home sales reached new highs… during the greatest period of unemployment in Canadian history. If that’s not a sign the government is telling banks to proceed with risky lending, I don’t know what is.”