Freddie and Fannie in The News: Reform, Risk Sharing, and MI; Investor Updates

How is it that we only have two days left in September, and that it is National Coffee Day already? Maybe you’ll receive a free or discounted cup at Krispy Kreme, Dunkin’ Donuts, McDonalds, or Peets. “Free” is definitely a great price, especially with all those bills out there. Speaking of which, here’s a story worth a gander by personal finance reporter Daniel Goldstein titled, Women are Better at Paying Bills - So Why is it so Hard for Them to Get a Mortgage?"

Before going on, yesterday the commentary had some rural updates. Ditech's, instead of saying "The Guarantee Fee is reducing from 2.75% to 1% and Guarantee Fee is reducing from 2.75% to 1%" should have read, "The Guarantee Fee is reducing from 2.75% to 1% and the Annual Fee is reducing from .5% to .35%." I apologize for any confusion.

There is a steady of stream of news, posturing, developments, and concern about what Fannie Mae and Freddie Mac, both overseen by the FHFA, are doing. Given the current, and foreseeable, market share that conforming conventional loans have, it is understandable. And this is happening in both the primary markets, directly impacting consumers, and in the secondary markets, impacting the demand for agency MBS.

Certainly vendors are tuned in to developments. For example, FormFree's founder and CEO Brent Chandler writes, "Industry demand for our AccountChek automated asset verification tool has grown dramatically since the Ability-to-Repay (ATR) rule went into effect in early 2014. Demand continues to grow as TRID is contributing to dramatic increases in the average time to close and lenders search for ways to become more efficient. AccountChek reduces the time needed to analyze borrower assets to a matter of minutes, and it decreases the time Quality Control needs to review a loan. Our customers see the tremendous value in paperless, automated asset verification that is GSE-approved. We think this is an idea whose time has finally come, and we anticipate continued and significant growth in Q4. (Inquiries should be directed to Chris Martin.)

The Community Mortgage Lenders of America (CMLA), in a joint letter with civil rights organizations, affordable housing groups and business groups, urged Congress to avoid piecemeal reform of Fannie Mae and Freddie Mac through riders to year end funding bills or other must-pass legislation. The joint letter cautioned Congress specifically against legislative riders dealing with the Common Securitization Platform (CSP) and risk sharing, pointing out that FHFA is currently addressing both issues in a detailed manner and seeking public input."

The CMLA's letter stated, "...arbitrary Congressional changes in these two areas could negatively affect borrowers and other stakeholders by interfering with affordable housing objectives and with fair secondary market access by small and mid-sized mortgage loan originators." In addition to the CMLA, the letter was signed by the Community Home Lenders Association, Corporation for Enterprise Development, Leading Builders of America, Leadership Conference on Civil and Human Rights, National Association for the Advancement of Colored People, and the National Community Reinvestment Coalition.

Switching gears from the government's role to that of the private sector, private mortgage insurance is in the news. MI covers 10-20% of the loans being originated, depending on who you ask (MI companies as of the end of last year took on about $184.5 billion in credit risk from Fannie Mae and Freddie Mac on $724.5 billion of mortgages, according to the FHFA, but there's no MI on non-QM or jumbo loans, for example). We're talking the transfer of mortgage credit risk to the private market through a pilot program of a specific deal structure by Freddie Mac. Remember that both Fannie and Freddie are under government conservatorship (something that is scheduled to end in a couple years) and that, when all is said and done, the taxpayer shoulders the risk for loans done through them.

The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, along with lawmakers, has been encouraged to become more prominent players in the companies' efforts to transfer mortgage-credit risk to the private market. Four mortgage insurers are participating in the pilot with Freddie. Freddie, from its perspective, will start the pilot program to increase the amount of risk it shares with private mortgage insurers. The program will apply to loans meeting certain criteria and acquired by Freddie from Sept. 1 through Feb. 28, and will transfer more than $100 million of backing to the private insurers, on almost $4 billion of loans.

All of this could mean more gross revenue for the MI companies, but what if a mortgage insurance company goes belly up? Are they reliable counterparties for the major league capital being discussed? The insurers may balk at the deals' structures, which require them to post extra collateral and give Freddie Mac and Fannie Mae the power to decide which insurers can participate. Perhaps F&F already have exposure to too much risk if one or more mortgage insurers were to bankrupt in a downturn, as some insurers did during the last eight years. Pick your poison: credit risk or counter-party risk.

With the expected mortgage volume of $4 billion, this would lead Freddie Mac to transfer a little more than $100 million-worth of risk to certain MI companies. Freddie will require them to put up cash or cash equivalents as collateral based on how risky they view a particular mortgage insurer to be. With traditional mortgage insurance, lenders choose which insurers to use, which in turn will influence the rates borrowers pay.

This "deep MI pilot program" from one or both the GSEs was expected and most believe that it could be an important step towards increasing the role of the MIs in the GSE risk-sharing market. Many, including the Mortgage Bankers Association (MBA), have been pushing for the FHFA to develop a front-end risk-sharing program with the MI industry. Generally, lenders should see it as positive that deep MI pilot programs are being tested by both GSEs, rolled out by Freddie, and this could be an important step towards increasing the role of the MIs in the GES risk-sharing market - which may help borrowers.

The USMI weighed in immediately. (USMI's members include Radian, Essent, Arch, Genworth, MGIC, and National MI; noticeably absent is UG, in the process of being purchased by Arch.) Lindsey Johnson, President and Executive Director of U.S. Mortgage Insurers (USMI), sent out a note saying, "...Freddie Mac and Fannie Mae have been experimenting with a number of structures to shift risk away from the GSEs to the private markets. The program announced for an offering with affiliates of private mortgage insurers is the latest addition to this effort. While it is good to see the GSEs continue to explore ways to reduce the government's mortgage credit risk exposure, this new offering is effectively a form of credit insurance that Freddie Mac stated builds on its Agency Credit Insurance Structure (ACIS), which is a back-end credit insurance program. While some mortgage insurers are exploring and may ultimately participate in this new credit insurance program, we believe it is important to note that this new structure should not to be confused with the deep cover, true mortgage insurance front-end credit risk transfer proposal that we and others have been advocating for."
 
Conventional conforming program changes by lenders and investors continue non-stop. For example...

Plaza has been doing some program guideline updates. Fannie Mae Multiple Financed Properties: The following Programs have been updated to reflect Fannie Mae's changes for multiple financed properties as announced in SEL-2016-03: Conforming Fixed, Conforming ARM, Fannie Mae Retained, High Balance Fixed, High Balance ARM and HomeStyle. Also, DU Refi Plus and Freddie Mac Relief Refinance: Section 1: Extend program end date to September 30, 2017. Section 18: Co-ops are now an eligible property type for DU Refi Plus loans.

PennyMac continues to see transactions where student loan payments are not calculated correctly. Click here to view the instructions on how to calculate student loan payments for Fannie Mae loans.

AmeriHome announced publication of the redesigned Conventional Agency Overlay Matrix and Government Overlay Matrix. At less than 3 pages, each matrix still provides the detailed information needed when selling loans to AmeriHome.

Fifth Third Mortgage has added Arch MI and National MI companies as options for borrower paid monthly and upfront lender paid mortgage insurance. Also, a Home Possible reminder that Borrower(s) must NOT have individual or joint ownership in any other residential property as of the Note date.

In the financial markets Wells Fargo's woes continue. California, Wells' home state, levied a set of sanctions against the bank. State Treasurer John Chiang is suspending investments by Treasurer's office in all WFC securities. The state is suspending using WFC as broker-dealer for purchasing investments, and suspending WFC as managing underwriter on negotiated sales of Calif. state bonds (where the Treasurer appoints the underwriter). These sanctions take effect immediately, will remain in place for the next 12 months. WFC may face tougher sanctions "up to and including complete and permanent severance of all ties" with Treasurer's Office if WFC fails to demonstrate compliance with consent orders or "evidence surfaces" has engaged in same behavior. California will work with Calpers & Calstrs to pursue governance reforms ensuring "this type of behavior and systemic corruption" doesn't reoccur. Ouch!

In the capital markets, bond prices worsened slightly Wednesday, with "slightly" being the operative word. Things barely budged in spite of comments from the Fed Chair Yellen, ECB's Draghi, volatile oil prices, news from Deutsche Bank & Wells Fargo (see above) and a sloppy 7-year T-Note treasury auction. The 10-year note closed .125 worse in price to yield 1.57% whereas the 5-year T-note and agency MBS prices were worse a smidge.

For titillating thrills today we've had Initial Jobless Claims (254k), final Q2 GDP (+1.4%), and advanced goods trade (including updates on advanced inventories, -.1%). Coming up at 10AM ET is August's Pending Home Sales Index. After the initial numbers we find the 10-year resting around 1.59% with agency MBS prices worse a few ticks.

Jobs and Announcements

In wholesale & correspondent news, Banc Home Loans TPO Division is "excited to roll out BOLT, our new, robust TPO web portal. It is designed with the user in mind and features a wide array of capabilities, vital to making it simple to do business with Banc Home Loans, including a single sign-on for all three channels so multi-channel clients can access their entire pipeline (Wholesale or Correspondent) all on one site. For wholesale brokers, our pricing engine will include their compensation in the net price. Clients can easily manage their pipeline and locks from the Pipeline View and those clients with large pipelines can archive loans as needed. All BHL forms, program guidelines tools can be easily accessed from the site without needing to log in, and clients can view all documents that have been uploaded in the Documents view. We are planning to introduce this exciting new site on Tuesday, October 11, and have planned preview sessions for our clients starting on Wednesday, October 5. Please contact your BHL Account Executivefor more details."

TruWest Credit Union is growing and is searching for someone to develop and maintain third party Mortgage origination in the Austin, TX market. "We are looking for an experienced wholesale or retail loan officer who can aggressively expand our third party origination with mortgage brokers, builders, and Realtors. TruWest offers members unique, customizable products like jumbo loans and second mortgages that are in high demand. Our pledge is to cultivate the best relationships, deliver the best products and work towards the best future for our community. We have been proudly helping our members reach their financial goals for more than 60 years. If you are wanting to work for a company with a great culture, commitment to its members, employees and products, please contact Nikki Badje or visit our career page at www.truwest.org."

A strong, privately held financial organization, international in scope, is looking to identify a Mortgage Warehouse Lending Leader for its entry into the residential mortgage warehouse lending business. This is a unique opportunity for the right individual to create and grow a new business line from the ground up, with the support of a well- capitalized organization. The successful candidate will have 10+ years of executive experience in warehouse lending, with particular emphasis on credit risk analysis and underwriting, including knowledge of secondary market loan underwriting guidelines. The candidate should have excellent communication and team building skills. Confidential resumes should be sent to me; please specify opportunity. Remote candidates accepted.