After the Federal Housing Finance Agency's decision to suspend the riskier loan purchase caps for government-sponsored businesses, some uncertainty remains for lenders and the secondary market.
The key word here is "exposure," noted several observers, and that alone does not create the hoped-for clarity on the question.
"Suspended means the suspension can be lifted next week. I don't think anyone really knows 100% where this is going," said Tom Hutchens, executive vice president of production at unqualified lender Angel Oak Mortgage Solutions.
From the point of view of Angel Oak and its non-QM competitors, "this cap has allowed a lot of private capital to participate in the mortgage space in recent months and [they] must have a pretty good idea of the execution" levels and prices, "said Hutchens." We've definitely seen interest from lenders looking to partner with those who represent private capital, which is what Angel Oak is. "
The lenders came to Angel Oak, which will originally buy up whole loans due to the caps, but they have now made the company their first option for these transactions and he expects this to continue in the future.
It's hard to tell what's on the road at this point, Hutchens said. The day after the caps were lifted, the FHFA issued a notice on the proposed regime to change the GSE capital structure.
In the meantime, the growth path of a burgeoning market for agency-compatible private label securitisations could slow down as a result. The now repealed regulation stipulated that lenders were not allowed to sell more than 7% of their investor and second home loans to the GSEs over a period of 12 months.
As a result, the PLS market for these loans has started to develop in the last few months and the at least temporary removal of this cap is likely to shift some of that back to the GSEs.
Or maybe not, said Bose George, an analyst at Keefe, Bruyette & Woods, because the preferred stock purchase agreement change was only suspended.
"Until something is finalized here, I know, I'm not sure if people are going to change their behavior drastically," said George. "[It's] not sure that people will make long-term decisions until there is something more final."
Nevertheless, competitive dynamics are developing in official loans.
"When news of GSE purchase caps was released earlier this year, it caused a lot of buzz and concern among most lenders," said Matt Garlinghouse, executive vice president, capital markets, Cherry Creek Mortgage. "Until now, and we have tremendous private market participation, so it will be interesting to see how these two worlds of agency and non-agency credit buying co-exist in the future."
The stability GSE funding provides contrasts with the less predictable private label market, said Bill Banfield, executive vice president of capital markets at Rocket Mortgage.
“Agencyless markets have historically been quite volatile, especially at a time when there is all kinds of financial crises. "explained Banfield.
This will likely make the GSEs the winners of this battle, added Joseph Mayhew, chief credit officer of Evolve Mortgage Services.
"With the withdrawal of the arrangement, it is expected that most second home, investment property and higher-risk borrowers will quickly return from the private securitization market to the GSE purchase window," Mayhew said. "The GSEs are owned by the Treasury Department, have virtually unlimited capital, and are fierce competition in the market to buy these loans, which is why such a high percentage of them will return in the end."
Between 12% and 14% of Homebridge Financial Service's business is investor and second home loans. "So we had to look for alternative sources, which we did," said CEO Peter Norden. "And we've been very successful, I have to say, but we think the execution will be dramatically better than what we're actually getting from Wall Street."
The PLS market for unused mortgages should continue to grow, said Maria Fregosi, chief investment officer at Homepoint. The situation is different with loans that are secured by second homes.
"We think the second home market has become tougher for [these] borrowers," added Fregosi. "We anticipate that removing this cap will help create liquidity for the second home buyer and the second home market."
Fannie Mae and Freddie Mac are enforcing credit-level price adjustments for the added risk of investment mortgages. "As a result, shipping to the non-agency markets can sometimes be cheaper, but not always," noted Banfield.
While the secondary market does not have LLPAs for second homes, individual lenders are free to put their own overlays on this product. And some did, but Rocket didn't and added market share to the product.
Homepoint has already removed the LLPAs for non-owner and second homes, noted Fregosi.
United Wholesale Mortgage has also already abolished the LLPAs for investment properties and second homes. "This is very positive for brokers and consumers across the country and we are pleased with this decision by the FHFA," added a company spokesperson.
The lifting of restrictions on purchases through the Fannie Mae or Freddie Mac cash window will have a positive impact on smaller companies in the industry such as Homebridge Financial, said Norden.
"We would all be forced to do most of our production in mortgage-backed securities like larger corporations," said Norden. "So that's a very big topic because No. 1 was a lot better execution in the cash window."
Then those who keep the mortgage servicing rights can choose whether their transfers are "as is" by using the cash window.
The less discussed cap for Banfield was a limit on the number of loans below a credit score of 680, a loan-to-value ratio of over 90%, and a debt-to-income ratio of over 45% that Fannie Mae and Freddie Mac could buy. While there were no signs at the time that the cap had been reached, this could come into play in the future, especially if the economy slows down.
"It could have been stressful if these caps had imposed restrictions that hindered people's access to credit," Banfield said. "The good news is we never got there, it doesn't look like it's going to happen."