The mortgage business is responding to the FHFA-Treasury GSE reform deal

Much of the mortgage industry welcomes the agreement between the Federal Housing Finance Agency and the Treasury Department that not only allows GSEs to hold more capital, but also sets the pricing requirements for loans sold to government-sponsored companies, regardless of the size of the loan Lender.

The Community Home Lenders Association made guarantee fee parity their top GSE priority and repeatedly called for the preferred stock purchase agreements to be amended to include this as a condition for exiting the conservatory.

Making this permanent "is important for smaller lenders, for borrowers, and to reduce the ruinous volume discounts for lenders like Countrywide who helped protect GSEs in 2008," said Scott Olson, executive director of CHLA, in a statement.

However, the National Association of Federally-Insured Credit Unions claimed that the rulemaking had to go one step further.

As the deal terminates the assets, the Treasury Department's liquidation preference for the senior preferred stock of Fannie Mae and Freddie Mac will increase.

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"We encourage the FHFA to work with Congress to codify certain safeguards – including those to ensure that credit unions have guaranteed and equal access to the secondary market and receive fair prices based on credit quality, not volume – before the GSEs will be officially discharged from the conservatory. "NAFCU President and CEO Dan Berger said in a statement.

The Mortgage Bankers Association, while glad that the agreement "maintains and expands" price parity, was concerned about parts that limit Fannie Mae and Freddie Mac's ability to purchase certain types of credit.

The agreement keeps so-called purchases of higher-risk single-family loans at their current levels and is a reminder of the upper limits for multi-family loans. Both are potential problems, said Bob Broeksmit, president and CEO of MBA.

"It is critical that measures to manage the GSEs' market footprint carefully balance the need for them to fulfill their mission of affordable housing for both single-family and apartment buildings," Broeksmit said in a statement. "Some of the regulations can prove inflexible under market stress and it will be vital for the FHFA and Finance to monitor this impact and remain open to change if necessary, especially for untested standards."

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

"We see these cohorts as attractive potential sources of longer-term growth for lenders like mortgage REITs," Hagen said in a report, noting that investment firms like Annaly and Chimera have aggregated and financed aggregated investor loans through agency securitizations in recent years.

"The Treasury's agreements do not necessarily add to the market share available for REITs, although this is likely to also help prevent any additional GSE support these loans could have received under in-depth management," he added.

The deal still leaves many unanswered questions, especially about the PSPAs, said Bose George, an analyst at Keefe, Bruyette & Woods. Fannie Mae and Freddie Mac's permission to hold capital increases the liquidation preference of the Treasury's preferred stock. The new arrangement doesn't specify how the PSPA will be resolved, noted George.

"Even so, capital build-up is positive and makes it easier for companies to later be privatized by either issuing the senior preferred debt or converting it to common stock," he said.

"As the new administration continues on the privatization path, the most likely scenario would be for the senior preference shares to be converted into common shares rather than canceling that debt," George said in a press release. "That would be watered down considerably." the common stock. "

In addition, it is expected that the privatization of GSE will not be a priority for the future Biden government.

For investors, the next milestone will be a Supreme Court decision in a case negotiated in early December that challenged the legitimacy of the FHFA's governance structure, said Randy Binner, an analyst at B. Riley Securities.

If the court rules that a president's inability to remove the FHFA director is unconstitutional, some hope it will move on to the next step and invalidate the high net worth sweep.

"Government actions related to the GSEs have always been questionable from our point of view, but the court has historically shown respect for previous regulatory actions," said Binner. "If anything, that deference seemed a little less clear, and discussions of the FHFA structure and nature of the conservatory seemed to us to have only marginally favored investor claims."

In the end, however, everything will fall back on federal legislature to get the outcome desired by the mortgage industry.

"The announcement is a reminder that Congress and the administration are still in their housing finance deals," said Ed DeMarco, president of the Housing Policy Council and former acting director of the FHFA, in a statement. "It will now be up to the Biden administration to work with Congress to end the conservatories and bring reassurance to the market about the GSEs and the government backlog."

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