Regulators keep putting the squeeze on independent mortgage banks

The big question in Washington is what is going to happen as the COVID crisis slowly ends and the change in government ushers in a new period of abuse of enforcement power against mortgage lenders by the Biden administration.

Vice President Kamala Harris, lest we all forget, catapulted into big time politics via the 2012 National Mortgage Settlement. So far, the policy changes in Washington seem to be mostly symbolic, though there is evidence that the Consumer Financial Protection Bureau is preparing for round two of the great Mortgage Inquisition.

Hannah Lang reports in NMN that the CFPB has rescinded seven policy statements issued last year under the Trump administration that gave flexibility to financial institutions dealing with fallout from the coronavirus pandemic.

The CFPB warned in a terse press release that, by winding down the seven policy statements, the agency “is providing notice that it intends to exercise the full scope of the supervisory and enforcement authority provided under the Dodd-Frank Act.” Translated into progressive newspeak, that means, get out your checkbook.

A key indication of the future at the Department of Housing and Urban Development came last week when Secretary Marcia Fudge said: "Given the current FHA delinquency crisis and our duty to manage risks and the overall health of the fund, we have no near-term plans to change FHA’s mortgage insurance premium pricing. We will continue to rigorously evaluate our strategy and work transparently with Congress.”

Fudge’s statement accompanied HUD’s quarterly report to Congress on the financial status of the Mutual Mortgage Insurance Fund, which noted that the rate of seriously delinquent mortgages has increased from 4% to 12% in the past year, while early payment defaults have risen from 1% to 6%.

Ian Katz at Capital Alpha Partners demurs: “We see a cut returning to consideration — most likely in 2022 — assuming the delinquency numbers show improvement. Since Fudge specifically mentioned the ‘delinquency crisis,’ it will be tough for her to reverse course until that crisis is clearly over.” We’ll see about the timing, but clearly delinquency in the government loan market is top of mind in Washington.

Meanwhile over at the Federal Housing Finance Authority, Director Mark Calabria continues to go “by the book” in terms of enforcing the statute regarding the supervision of Fannie Mae and Freddie Mac. The conflicting rules put in place by Congress require Calabria to prepare the GSEs to exit conservatorship, all the while taking steps to limit risk to the taxpayer.

Neither goal will be achieved and, in the process, much damage is being done to this crucial sector of the economy. Perhaps the biggest change made by Director Calabria so far is limiting purchases of loans via the cash window, a step that is going to have severe negative consequences for the mortgage market and consumers by limiting the availability of credit.

Dozens of smaller nonbank issuers and also depositories such as credit unions are likely to be forced out of business by this unnecessary change. Risk to the GSEs from cash window purchases are minimal. The winners are the biggest banks, who will gain further monopoly power over the secondary mortgage market when it comes to loan purchases and providing liquidity.

“This is potentially a big deal, particularly to non-bank and smaller originators who rely on the cash window for liquidity and certainty, writes Lee Smith, president of mortgage at Flagstar Bancorp. He continues:

“Non-bank originators are not just constrained operationally through available capacity but also financially through warehouse line availability. They don’t have infinite operating capacity or warehouse availability, and so the ability to convert loans to cash quickly is important.”

Depriving smaller independent mortgage banks and depositories of an important source of liquidity may seem like a nifty way to reduce risk inside the confines of the FHFA’s HQ. In fact, the changes to the cash window may actually increase systemic risk and limit the availability of credit to consumers at a crucial time for the U.S. economy.

While Calabria is now migrating to the progressive left rhetorically, his decisions to date are conservative and imply a slow death for the GSEs and IMBs operating in the conventional market. Look at Calabria’s steps so far: no liquidity support for IMBs during forbearance, a punitive first payment forbearance fee of 500-700bp on COVID loans, a 50bp adverse market fee on refis to subsidize the GSEs at consumer expense, an aggressive capital rule that ends efforts by the GSEs to limit taxpayer risk, and a 7% cap on loans for non-owner-occupied (NOO) and second homes.

“If there was ever a doubt to what Mark Calabria is doing and has done since taking the helm at FHA, look at his testimony from 2011,” former Mortgage Bankers Association President David Stevens tells NMN. “Calabria calls for reducing the role of IMBs by shifting volume to banks and thrifts. He calls for the elimination of NOO loans, the lowering of conventional loan limits, GSE employee pay caps, and throwing them into receivership.”

Of note, Sen. Pat Toomey (R-Pa.), ranking member on the Senate Banking Committee, just released his principles for GSE reform. Among them is a government backstop, private capital, competition, protection for taxpayers and the availability of the 30-year fixed-rate mortgage.

But none of these talking points from Sen. Toomey are really relevant to the mortgage market of 2021, where banks are running away from 1-4s and the GSEs are being sidelined by the rules imposed by the FHFA. As banks retreat from the market, IMBs now originate and service two-thirds of all one- to four-family residential mortgage loans.

As this writer noted in a recent blog post, banks saw a huge, $400 billion net decline in assets serviced for others and portfolio in 2020 due to loan prepayments. Banks did not replace these loans. In the meantime, IMBs have picked up $2 trillion in market share since the end of 2018.

More competitive IMBs captured trillions of dollars in loan refinance events in 2020, resulting in a sharp drop to just $3 trillion in ASFO and just $2 trillion in one- to four-family loans held by banks in portfolio.

Commercial banks continue to decrease their commitment to residential housing due to Dodd-Frank, Basel III and state level regulatory abuses. When Director Calabria argues for a decreased role for the GSEs in the residential loan market, one wonders if he, Sen. Toomey and the Biden administration are aware of these important trends.

We should all ponder what the housing market will look like if Director Calabria remains in office through 2021 and continues to reduce the footprint of the GSEs. Unless Congress and the Biden administration recognize that the real issue at stake in housing reform is maintaining a competitive alternative to the largest banks, we doubt there will be any relief for the mortgage industry from negative developments in Washington.