Fannie, Freddie cap suspension leaves questions for mortgage lenders

There remains a level of uncertainty for lenders and the secondary market following the Federal Housing Finance Agency decision to suspend the riskier loan purchase caps on government-sponsored enterprises.

The key word here is "suspend," several observers noted and that in itself doesn't provide the clarity around the issue that had been hoped for.

"Suspended means it can be unsuspended again next week, I don't think anybody really knows 100% where it's headed," said Tom Hutchens, executive vice president of production at non-qualified lender Angel Oak Mortgage Solutions.

From the perspective of Angel Oak and its non-QM competitors, "a lot of private capital has been able to participate in the mortgage space due to this cap in the last few months and [they] have to have a pretty good idea of execution levels and pricing," Hutchens said. "We've definitely seen interest from lenders wanting to partner with those that represent private capital, which is what Angel Oak is."

Lenders came to Angel Oak, which will purchase whole loans, originally because of the caps, but they now have made the company its first option for these transactions and he expects that to continue going forward.

It is hard to tell what lies down the road at this point, Hutchens said. The day after suspending the caps, the FHFA put out a notice of proposed rulemaking to amend the GSE capital structure.

Meanwhile, a burgeoning agency-eligible private-label securitization market could see its growth path slowed as a result. The now-suspended rule had dictated that lenders could not sell more than 7% of their investor and second home loans to the GSEs over a 12-month period.

As a result, the PLS market for these loans was starting to develop in recent months and suspension of that cap, at least temporarily, likely shifts some of that back over to the GSEs.

Or maybe not, said Bose George, an analyst with Keefe, Bruyette & Woods, because the amendment to the Preferred Stock Purchase Agreement was only suspended.

"Until something is finalized here, you know, I'm not sure if people are going to drastically change their behavior," George said. "[It's] not sure people will make long term decisions until there's something more final."

Still, a competitive dynamic is being established for agency-eligible loans.

"When the news came out earlier in the year on the GSE purchase caps, it created quite a stir and a lot of anxiety for most lenders," said Matt Garlinghouse, Cherry Creek Mortgage's executive vice president, capital markets. "Fast forward to now, and we have tremendous private market participation, so it will be interesting to see how these two worlds of agency vs. non-agency loan purchases co-exist going forward."

The stability GSE financing offers stands in contrast to the less predictable private-label market, said Bill Banfield, executive vice president of capital markets at Rocket Mortgage.

"The nonagency markets are historically pretty volatile, especially in times when there's any kind of financial crises, so to be able to have the GSE to be dependable to allow lenders to deliver into that is what I see is the biggest thing for the industry," Banfield declared.

That is likely to make the GSEs the winner in this battle, added Joseph Mayhew, Evolve Mortgage Services chief credit officer.

"With the roll-back of the agreement, it is expected that most of the loans for second homes, investment properties, and higher risk borrowers will quickly return to the GSE purchase window from the private securitization market," Mayhew said. "Being owned by the Treasury, the GSEs have virtually unlimited capital, and are a formidable force to compete with in the market for purchasing these loans, which is why such a high percentage of them will end up returning."

Between 12% and 14% of Homebridge Financial Service's business is investor and second home loans. "So we had to scramble to find alternative sources, which we did," said CEO Peter Norden. "And we did very successful I have to say, but we think that the execution will be dramatically better than what we're actually getting from Wall Street."

The PLS market growth for nonowner-occupied mortgages should continue, said Maria Fregosi, chief investment officer at Homepoint. But the situation for loans secured by second homes is different.

"We do think that the second home market had gotten more challenging for [those] borrowers," Fregosi added. "We expect the lifting of that cap will help create liquidity for the second home buyer and the second home market."

Fannie Mae and Freddie Mac put loan level price adjustments for the additional risk on investment property-secured mortgages. "Which is why delivering into the nonagency markets sometimes can be priced more advantageously, but not always," Banfield noted.

While the secondary market does not have LLPAs for second homes, individual lenders are free to put theirown overlays on that product. And several have, but Rocket didn't and added market share for the product.

Homepoint already has removed the LLPAs for nonowner-occupied and second homes, Fregosi noted.

United Wholesale Mortgage also has already dropped the LLPAs for investment properties and second homes. "This is very positive for brokers and consumers around the country and we are happy with this decision from FHFA," a company spokesperson added.

Removing the limitations on purchases through Fannie Mae or Freddie Mac's cash window is going to have a positive effect on the smaller companies in the business like Homebridge Financial, Norden pointed out.

"We were all going to be forced to deliver most of our production as larger companies [do] in mortgage backed securities," Norden said. "So that's a very big issue, because No. 1, the execution in the cash window has numerous times been better."

Then, by utilizing the cash window, those keeping the mortgage servicing rights can elect to make their remittances "actual-actual," a method that does not force them to make advances to the investor when the borrower's payment is late, he continued.

The less talked about cap for Banfield was a limitation on how many loans below a 680 credit score, a loan-to-value ratio above 90% and debt-to-income ratio above 45% that Fannie Mae and Freddie Mac could purchase. While no signs arose that the cap was being reached at this time, in the future, especially with an economic downturn, that could have come into play.

"It could have caused stress, where those caps would have imposed restrictions that impeded the ability for people to have access to credit," said Banfield. "The good news is we never got there, it doesn't look like it's going to happen."