With the departure of Director Mark Calabria as head of the Federal Housing Finance Agency, arguably the most powerful position in the housing finance complex, a time of confusion and contradictions for the industry ends.
Calabria, on the one hand, limited and reduced the footprint of Fannie Mae and Freddie Mac. At the same time, Calabria pretended to have a real possibility of ending government conservatories through the GSEs.
The Supreme Court ruling on the constitutionality of the FHFA's governance structure enabled President Joe Biden to remove Calabria immediately. The court's decision surprised many in the industry.
“The court took an unexpected legal approach to the legal issue,” writes bank analyst Dick Bove.
“It argued that the FHFA's first requirement was to think about the risks the public was facing. Second, keep the secondary mortgage market at its normal pace. "
Bove continues, “The third was to worry about the condition of two secondary market companies, Fannie Mae and Freddie Mac. However, the court believed that the health of these companies could and should be compromised if either of the above two concepts were compromised, ”he concludes.
With the appointment of industry veteran Sandra Thompson as acting FHFA director, the industry can relax a little after four turbulent and sometimes anxious years under Calabria.
"Sandra is a highly skilled and widely respected regulator who understands the secondary market, GSEs and conservatories," former FHFA director Ed DeMarco told NMN. "She's going to do a great job as an acting director."
"Sandra's tenure at FHFA makes her a smart choice to take on the acting role," Faith Schwartz, president of Housing Finance Strategies, told NMN. "With her background at the FDIC and FHFA, she is very familiar with the issues of liquidity, affordable housing and corporate risk management."
After four years of upheaval from the FHFA, the mortgage industry is longing for a period of stability. On several occasions, various industry leaders and trade groups have been forced to publicly reprimand Calabria for its unilateral measures to reduce the role of the GSEs in supporting the mortgage market.
Regarded as conservative, Calabria has inexplicably encouraged the Financial Stability Board and the Conference of State Banking Supervisors to impose bank-like capital requirements on independent mortgage lenders. He also ended the GSEs' widely successful credit risk transfer transactions, which reduced the taxpayer risk of these housing companies
The Calabrian FHFA even published erroneous research on CRTs criticizing this private-sector mechanism for reducing the risk of GSEs. Former Freddie Mac CEO Don Layton put FHFA research on CRTs published during Calabria's arbitrary tenure in political context in a comment for the Harvard Joint Center for Housing Studies:
“It starts with the predefined conclusion that 'CRT is not working,' a position that FHFA Director Mark Calabria has made since his early days in office. It then selects dates and skews arguments to support that predetermined conclusion, ignoring or discarding arguments to the contrary. "
Calabria's restriction on cash advance sales to the GSE and credit limits on investor real estate was another sore point in the industry. These loans have since found welcome acceptance in the private label non-agency loan market, but expect the Biden administration to eventually reverse these changes.
The mortgage industry's hope, of course, is that President Biden will avoid choosing another academic economist to lead the FHFA. Calabria's tendency not to seek advice from the professional staff at GSE and FHFA is another major concern of the industry.
With her strong regulatory background at the FDIC for two decades, Sandra Thompson would be an excellent candidate to be the FHFA director. It is a great opportunity for President Biden to recognize a leading female executive in the mortgage industry. There is no doubt that a lot of energy and time is spent speculating about the next FHFA nominee.
Meanwhile, the industry is in the midst of a turning point from a year of great profitability in 2020 to a year where spending management is back in vogue as the process of curbing loan defaults intensifies.
Following the CDC's decision to extend the eviction moratorium for a final month to July 31, 2021, the Biden government announced a series of measures to help state and local governments prevent evictions. The government is also taking steps to stabilize homeowners and help a return to a more stable housing market, including extending the federal mortgage enforcement moratorium for a final month to July 31.
Once the housing aid approved by Congress begins to flow, the Biden administration is expected to let the moratoriums on foreclosure expire, but that still does not mean that any significant foreclosures will begin.
Many loans that are now tolerated are subjected to a tormented waterfall of modifications and partial claims that will significantly increase service costs. The primary concern of the Biden White House is to avoid "unequal effects" on minorities. Here's how the process will go:
First, the servicer will ask the defaulting borrower if they can repay the $ 15-20,000 arrears accumulated during the COVID Forbearance. Most of the time the answer will be no.
Then the servicer will ask the borrower if they can resume the previous level of payment when the arrears on the loan are reset. About half will say yes, the other half will require a partial entitlement or a change or both.
The servicer will then convert the defaulting borrower into a loan with the high coupon of 2 to 3 percent. Some of these loans will work, but many will eventually fail. But few, if any, loans that are currently tolerated will not be eligible for foreclosure until early 2022 at the earliest.
As the year progresses, tightening credit spreads and vicious competition for credit in the secondary market will put pressure on the IMB's spending and liquidity. As Biden administration officials look for progressive victories and photo opportunities, the industry will clean up the mess.
The new FHFA director needs to be prepared to deal with the failure of a major IMB if credit markets become more volatile than they were in March 2020. The bidding war between Rocket, United Wholesale, and other major public and private aggregators could result in many smaller IMBs close their doors. This increases the urgency to reverse some of the Calabrian era changes in the operations of the GSEs.
Not only do IMBs need to worry about changes in the FHFA, revisions to the service falls, and progressive political activists looking for trophy scalps, but they also need to move in a market that increasingly believes we are on the verge of changing the Fed Interest rate policy. Watch out for higher mortgage rates and volatility. Just another day in the life of mortgage finance.