PSPA changes would have marginal effect on lenders, analysts say

It would be a modest positive for publicly-traded mortgage companies if the newly installed acting Federal Housing Finance Agency head reverses some of the January purchase restrictions her predecessor placed on the government-sponsored enterprises, industry analysts say.

The limited impact is due to "the context of a market that's going to be down by 40% between 2020 and 2022," explained Bose George, an analyst with Keefe, Bruyette & Woods. Acting Director Sandra Thompson removing the caps on investment and higher risk loans would only open up some areas of business for the more traditional mortgage lenders, but not enough to cover the drastic falloff in refinancings going forward.

"So, I feel like the changes that could happen are changes on the margin," George said. "I don't think it's going to really change the mortgage market in ways that really are meaningful for the investment community."

In fact, after some initial euphoria, four of the five mortgage companies that have recently become publicly traded had their stock prices return to below where they were prior to the ruling in Collins v. Yellin.

"Those are big lenders and so stuff that happens in the margins isn't really going to impact them, because they're big parts of what's happening broadly," George said.

The list of recently public mortgage lenders includes Rocket Cos., loanDepot, United Wholesale Mortgage, Guild and Home Point Capital. A sign that investors have already discounted the FHFA decision is that of that group, only Guild Mortgage closed on July 1 at a higher price than on June 22, the day before the decision was released.

The January agreement was a net positive for the business at non qualified mortgage wholesale lender Angel Oak Mortgage Solutions, primarily because it increased customers' familiarity with its product niche.

"I would say a lot of it was that it helped with our awareness efforts," Tom Hutchens, its executive vice president, explained. "We and other non qualified mortgage lenders were able to say 'listen, the caps don't apply to the non-QM space.'"

Part of what former FHFA Director Mark Calabria was seeking with the caps was to attract private capital to support mortgage lending.

"We've always believed the market needed more private capital options. And to me this is a perfect example of thank goodness, there are options, because otherwise originators just had to turn business down because they were already over their caps," Hutchens said.

The second homes and investment properties that the caps primarily target are not quite in line with the Biden Administration's goal of expanding housing opportunities in the United States, Hutchens noted.

Still, if those caps were to be lifted, a seed has been planted with the third party originators Angel Oak works with that should continue to drive the company's business.

Hutchens and William Tessar, the president of Civic Financial Services, are also bullish right now because the interest rate spread between the agency and non agency market is so narrow the pricing benefit for selling to the GSEs doesn't outweigh the convenience factor for working with a private lender.

Both Angel Oak and Civic originate business purpose loans; Angel Oak also originates bank statement mortgage products.

While the imposition of the GSE cap did have an effect on Civic's business, "it was more optics than moving the needle," Tessar said.

Civic's long-term rental property 5/1, 7/1 or 10/1 interest-only adjustable mortgages have rates "so low in that particular sector that it rivals that of a conventional lender," Tessar said.

"That is a big driver there, just given this big spread differential between our pricing and conventional on the rental stuff," Tessar said. So as for the caps, "I think it has an impact, but not a material one," and thus would have a limited effect if they went away.

The mortgage insurers, whose current business model is heavily dependent on the GSEs, might also see some initial benefit from any potential changes Thompson could make.

"The initial outlook is positive and that's really because we think that the FHFA under the new director tends to be very supportive with the consumer," KBW's George said. "But at the same time, at the moment it's hard to argue the consumer needs any help at least on the GSE side because you know housing is obviously very strong and because delinquency rates are very low."

From that standpoint, KBW felt the move at the FHFA was good for the MIs in the near term, because it provides a leg of support to the market if it were to be needed, which right now does not seem to be the case.

The long-term outlook is mixed, because less government involvement in the mortgage business is seen as a positive for the MIs, but the Biden administration is expected to have a larger presence in the housing sector, George said.