WASHINGTON – Reforms to government oversight of Fannie Mae and Freddie Mac announced by the Trump administration in recent days have come under fire as lenders, residential property lawyers and others accuse one of the changes that penalize minority borrowers.
Critics focus on a provision that limits the number of "high risk" loans Fannie and Freddie can buy. The new guideline defines such mortgages based on a borrower's credit-to-value ratio and debt-to-income ratio, as well as a borrower's creditworthiness.
Many in the credit industry and elsewhere argue that the changes will disproportionately harm people of skin color who are having a harder time accessing credit.
"Given these limitations on LTV, DTI, and FICO scores, they appear to objectively contradict Fannie and Freddie's missions," said Ann Kossachev, director of regulatory affairs for the National Association of Federally-Insured Credit Unions. "If the mission is to give access to all Americans … it has defeated the purpose."
Some also criticized restrictions in the new agreements that limit the size of transactions entered into through the GSEs' cash window. Smaller lenders can use the window to generate liquidity through higher volume sales.
In January, days before President Biden took office, former Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency director Mark Calabria agreed to amend the so-called preferred stock purchase agreements that govern the conservatories of state-sponsored corporations.
The changes allow Fannie and Freddie to keep all of their earnings until they meet the requirements of the FHFA's new capital framework, which is deemed necessary for companies to ultimately re-enter the private sector.
However, the agreements also contained some restrictions on the GSEs' business practices, including limiting the purchase of high-risk single-family mortgages to 6% of their total book and high-risk refinancing to 3%. Under the new PSPA, a loan is considered high risk if two of the following conditions are met: it is more than 90% of the value of a home, the borrower's DTI is greater than 45%, or the borrower has a FICO below 680.
Real estate finance experts say the policy, based on the mean LTVs, DTIs, and credit scores of black and Hispanic borrowers, will make it harder for people of color to access credit. For example, the median LTVs for Black and Hispanic borrowers in 2019 were 96.5% – higher than the cutoff – in 2019 compiled by the Consumer Financial Protection Bureau.
"The limit values imposed in the PSPAs make little sense," said a February report by the Urban Institute. "They are not an efficient or effective way for GSEs to manage their risk, but they come at a significant cost and undermine the capabilities of policy makers." to support the mortgage market on multiple fronts. These limits have a disproportionate effect on color borrowers and unnecessarily on future political decisions. "
This limit comes on top of the new capital requirements that require Fannie and Freddie to hold wider cushions for riskier loans, which, according to the Urban Institute, made the new limits "redundant.
"The FHFA has already implicitly set prices for mortgage products that are constrained in the PSPA by their ultimate risk-based capital rule," the report said.
Confusion has been expressed by many industry stakeholders that the regulations they warn about could have unintended consequences.
“All we've learned about drawing a mortgage is that it's a dynamic equation that compensates for risk factors. Every time you try to put this into a simple box, you have to consider unintended consequences at best, and consequences at worst. Ulterior motive, ”said David Dworkin, President and CEO of the National Housing Conference.
Some argue that the high risk loan restrictions in the new agreements, as well as the cash window restrictions, could force the Biden government to revise the preferred stock agreements.
"We believe Team Biden is not deterring Fannie and Freddie from supporting minority home ownership," Jaret Seiberg, an analyst with the Cowen Washington Research Group, said in a note accompanying the Urban Institute's report. "This indicates that Biden's finance department will reopen the preferred stock purchase agreement."
The result of the new agreements negotiated by Mnuchin and Calabria could be a larger home ownership gap, said Laurence Platt, partner at Mayer Brown.
"I think the wealthy will continue to have the privilege of receiving credit and the less than wealthy will continue to have the privilege of receiving credit," he said. "With a larger proportion of potential borrowers from Farben who are less wealthy, I think this will have an impact on their access to credit."
Under the agreements, Fannie and Freddie will not be able to earn more than $ 3 billion from a single seller through the cash window starting next year, lowering prices for lenders to sell loans directly to the GSEs. Industry experts say certain lenders could be prevented from doing business with the GSEs.
Rather than restricting the risky loans Fannie and Freddie can acquire, the FHFA could have relied on its own capital lines and oversight functions to keep businesses safe and sound, said Pete Mills, senior vice president at the Mortgage Bankers Association .
"All of these caps, for both the product and the cash window, are all issues that should, and likely should continue to be, be addressed by the FHFA regulatory and then continue to be through the workings of the capital rule," he said.
The additional limits are "not intuitive," agreed Ron Haynie, senior vice president of mortgage finance policy for the Independent Community Bankers of America.
"The product restrictions and the checkout window restrictions and the high risk restrictions make no sense," he said.
In a statement, the FHFA said Calabria "appreciated the issues raised in the Urban Institute newspaper."
"He looks forward to discussions about steps that can be taken to empower companies so that they can serve the market in good times and bad," said a spokesman. "It's important to note that the biggest constraint on the credit box is the lack of capital in the businesses that the PSPA is helping to build."
The FHFA spokesman said the restrictions on high risk loans and the use of the cash window were emphasized by the finance department, which was headed by Mnuchin at the time.
This could open the door for a revisit of the PSPAs under current Treasury Secretary Janet Yellen if she supports a different approach.
“There are ways to change the PSPAs further. You just have to agree on them so that some of these changes can certainly be rolled back in the future, ”said Kossachev. “It's not set in stone. The PSPAs have now been changed several times, and that could happen again. "
In particular, Mills said he could see the Biden government re-examine the cap on the use of the cash window, which he described as a "solution in search of a problem".
The Urban Institute expressed concern that the cap could undermine the uniform security issued by Fannie and Freddie in 2019 to increase liquidity and encourage market participation.
"If you eliminate larger players who are able to sell into the cash window, you will reduce the diversity in those pools and that will affect pricing," said Haynie.
Kossachev added that cash window restrictions could limit the ability of smaller lenders to "serve the communities most in need."
"Fair pricing and equal access – these are our core principles, and we just want to make sure that the ongoing administrative reforms that are taking place at the FHFA and the Treasury Department keep those principles at their center," she said.
Platt said the FHFA and Treasury Department may not have been able to balance the need for GSEs to raise capital with the need for GSEs to fulfill their public mission of making home ownership affordable and accessible.
"On the one hand, public policy is actively trying to find ways to improve access to credit for these emerging populations, while at the same time balancing it with the risk of loss," he said. "It seems contrary to this larger public policy goal to provide responsible credit to people who have failed in the past."