Mortgage industry reacts to FHFA-Treasury's GSE reform deal

Much of the mortgage industry applauds the agreement between the Federal Housing Finance Agency and Treasury, which in addition to allowing the GSEs to hold more capital, codifies the pricing requirements for loans sold to the government-sponsored enterprises, no matter the lender's size.

The Community Home Lenders Association made guaranty fee parity its top GSE priority, repeatedly calling for the amendment of the Preferred Stock Purchase Agreements to require that as a condition for exiting conservatorship.

Making that permanent "is important to smaller lenders, to borrowers, and to reducing the ruinous volume discounts to lenders like Countrywide that contributed to the GSEs' conservatorship in 2008," Scott Olson, CHLA's executive director, said in a statement.

But the National Association of Federally-Insured Credit Unions asserted that the rulemaking needs to be taken a step further.

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"We encourage the FHFA to work with Congress to codify certain protections — including those to ensure credit unions have guaranteed and equal access to the secondary market and receive fair pricing based upon loan quality, not volume — before the GSEs are officially released from conservatorship," NAFCU President and CEO Dan Berger said in a statement.

The Mortgage Bankers Association, while happy the agreement "preserves and extends" price parity, was concerned about parts that limit Fannie Mae and Freddie Mac's capacity to purchase certain types of loans.

The agreement keeps so-called higher-risk single-family loan purchases at their current levels and it memorializes the multifamily lending caps. Both are potential problems, MBA President and CEO Bob Broeksmit said.

"It is critically important that measures to guide the GSEs' market footprint carefully balance the need for them to meet their affordable housing mission for both single-family and multifamily homes," said Broeksmit in a statement. "Some of the provisions may prove inflexible during market stress, and it will be vital for FHFA and the Treasury Department to monitor those impacts and remain open to changes as necessary, especially for untested standards."

On the other hand, Eric Hagen, an analyst for BTIG, sees keeping those caps at the current limits as an opportunity for the private-label mortgage market.

"We see those cohorts being attractive potential sources of longer-term growth for lenders such as mortgage REITs," Hagen said in a report, noting that investment firms such as Annaly and Chimera have been aggregating and financing agency-eligible investor loans through securitization in recent years.

"Treasury's agreements don't necessarily expand the market share available for REITs, although at the same time, it likely helps stymie any additional GSE support those loans could have received under the incoming administration," he added.

The deal still leaves a lot of open questions, especially about the PSPAs, said Bose George, an analyst with Keefe, Bruyette & Woods. Permitting Fannie Mae and Freddie Mac to retain capital increases the liquidation preference of those preferred shares held by Treasury. The new agreement does not specify how the PSPA will be resolved, George noted.

"Nevertheless, the buildup of capital is positive and does make it easier for the companies to be privatized later by either forgiving the senior preferred debt or converting it to common shares,” he said.

“However, to the extent the new administration continues along the privatization path, the most likely scenario would be a conversion to common of the senior preferred shares as opposed to forgiving that debt," George said in a press release. "This would meaningfully dilute the common shares."

Furthermore, GSE privatization is not expected to be a priority for the incoming Biden administration.

For investors, the next milestone is a decision from the Supreme Court in a case heard in early December, which challenged the legitimacy of the FHFA's leadership structure, Randy Binner, an analyst with B. Riley Securities, pointed out.

If the court rules that a president's inability to remove the FHFA director is unconstitutional, some hope it will go to the next step and declare the net worth sweep to be invalid.

"Government actions around the GSEs have always been questionable in our view, but the court historically shows deference to past regulatory actions," Binner said. "If anything, that deference seemed somewhat less clear, and discussions around FHFA structure and the nature of the conservatorship seemed to marginally favor investor claims, in our opinion."

In the end, however, it will all fall back to the federal legislative branch to ensure the outcome the mortgage industry desires.

"[The] announcement reminds us that Congress and the administration have unfinished business in housing finance," Ed DeMarco, the president of the Housing Policy Council and former acting director of the FHFA, said in a statement. "It will now be up to the Biden administration to work with Congress to end the conservatorships and bring certainty to the market regarding the GSEs and the government's backstop."